Hedge funds drop European stocks for US, Japan

Hedge funds dropped European stocks for the US and Japan, analysts said German share price index DAX graph is pictured at the stock exchange in Frankfurt.

Hedge funds abandoned European equities last week for stocks in the United States and Japan, client notes from JP Morgan, Morgan Stanley and Goldman Sachs show, as strong economic data lifted equity markets in both countries.

Commodity Trading Advisors, hedge funds that employ algorithms to trade market trends, have rotated out of European and Hong Kong stocks and have moved into the United States and Japan, the New York Stock Exchange reported on Monday.

These funds have taken the largest bullish position in Japanese stocks seen in about two years, while long, or bullish bets on UK stocks were trimmed the most in May.

A strong U.S. jobs report and relief that a U.S. debt ceiling crisis had been averted propelled the S&P 500 Index to its highest since last August on Friday, while investors are betting the Bank of Japan would maintain its ultra-loose policy, bringing the Nikkei to a 33-year-high in its biggest daily gain since Jan. 18 on Monday.

Hedge funds' net buying in North American stocks rose to the highest level Goldman Sachs had seen in about five months, driven by investments in information technology, consumer staples and health care, a Goldman Sachs note to clients said.

The average net selling in U.S. energy stocks rose to 10-week highs and neared the highest levels since 2018, the note said.

Hedge funds also bought shares of North American financial companies, healthcare care, industrials and consumer-related sectors, a Morgan Stanley note said. A separate note on Monday published by Morgan Stanley said markets were now in the midst of several hotter but shorter earnings cycles. An earnings recession this year is likely but not yet priced by markets, the note said.