| LONDON, July 24
LONDON, July 24 Hedge-fund bets that peripheral
euro zone bank stocks were set for a fall were confounded on
Thursday by better-than-expected results from Spanish banks and
bright spots in the bloc's economic recovery.
This combination led some investors to close their negative
bets - a practice known as short-covering, which involves buying
back shares they had previously borrowed and sold.
Some analysts said market sentiment on the banks was turning
and that short-sellers were likely to remain on the sidelines
Shares of Spain's Bankinter and Banco Sabadell
were up 1.8 percent and 3.7 percent respectively on
Thursday after reporting a pick-up in profit recovery, while
Portugal's Banco Espirito Santo and Millennium BCP
rose 2.5 percent and 6.4 percent.
A fresh batch of manufacturing PMI data from the euro zone
showed some bright spots and was another trigger for the
reversal of short bets, traders said.
"You're getting better PMI (data), BES seems to be sorting
itself out, the earnings season is good - all of that would
point to the upside for peripheral banks," Antonin Jullier,
global head of equity trading strategy at Citi, said.
"Going long or at least covering the shorts on peripheral
banks is a lot more interesting from a risk return point of
Short interest in southern European banks has mounted over
the last three months due to weaker economic data in countries
such as Italy and Portugal and financial problems gripping
Espirito Santo's founding family.
Short sellers borrow a stock and sell it, betting they would
be able to buy it back at a lower price before returning it to
the lender and collecting the difference.
Nearly 40 percent of BES's lendable stock was out on loan at
the market close on Wednesday, 10 times as much as the market
average, but down 8 percentage points since the firm said on
Tuesday that Goldman Sachs and U.S. hedge fund D.E. Shaw
had taken a combined 5 percent stake in it, Markit data showed.
Short interest in Sabadell was 38 percent before it released
results, with Millenium BCP and Spain's Banco Popular ,
which are due to report next week, also heavily shorted, the
Thomson Reuters indexes of Portuguese, Spanish and Italian
banks fell between 10 percent and 25 percent over the past month
and a half.
"I had been expecting it (this short covering) for a few
days, in light of the recent performance and because results
were coming up and there was no reason to believe they would be
all that bad," a trader in Milan said.
"The move should last a little while as the catalyst
(results) is fairly close and this could lead to an
outperformance of financial shares."
(Reporting By Francesco Canepa; Editing by Lionel Laurent)