Shorts Are Abandoning Stocks Here

European Central Bank (ECB) President Mario Draghi disappointed global financial markets earlier this month by merely cutting the ECB's deposit rate to -0.3 percent while announcing a six-month extension of the ECB's 60 billion euros a month quantitative easing regime. Markets were hoping for a deposit rate of -0.4 percent and for the ECB's QE program to be extended for a year while being boosted to 75 billion euros a month.

In the wake of that disappointment, the euro surged against the U.S. dollar while Eurozone stocks and the corresponding U.S.-listed exchange traded funds were decked. There is some silver lining here. First, the ECB has left room for more stimulus, if needed, and markets have had time to digest the disappointing news. Second, short sellers in some major European equity benchmarks are disappearing.

“Despite seeing its fair share of the global market volatility, short interest across the Euro Stoxx 50, as gauged by the demand to borrow shares of its constituents, has remained relatively stable over the year so far. The current demand to borrow the index’s shares now stands at 1.1% of shares outstanding; a number that has remained pretty much flat on the year,” said Markit in a recent note.

The SPDR EURO STOXX 50 ETF FEZ, an ETF with more than $4 billion in assets under management, tracks the Euro Stoxx 50 Index, one of the most widely followed European equity benchmarks. As its name implies, FEZ is home to 50 stocks, more than 78 percent of which hail from France and Germany. In order, Germany and France are the Eurozone's two largest economies.

FEZ has a currency hedged equivalent, the SPDR EURO STOXX 50 Currency Hedged ETF HFEZ. HFEZ holds FEZ with a short euro overlay. Highlighting the emphasis of these ETFs on large-caps is a weighted average market value of nearly $72.6 billion. HFEZ is State Street's first currency hedged ETF. HFEZ debuted in June. 

Another remarkable aspect the current state of eurozone short interest is the fact that only one constituent of the Euro Stoxx 50 index sees any material short interest, as gauged by having more than 3% of shares outstanding. That honour goes to Italian insurer Generali which has 6% of its shares currently out on loan,” adds Markit.

Italy, the Eurozone's third-largest economy, is FEZ's fourth-largest country allocation at nearly 7.7 percent. The ETF is home to some familiar names with New York listings, including French oil giant Total SA TOT, German software maker SAP AG SAP and Spain's largest bank, Banco Santander SA SAN.