Short sellers make big bets against oil and e-commerce companies Zip, Afterpay

After Powell’s portentous speech rocked markets on Friday and Monday, futures traders raised expectations that the Fed’s cash rate will hit 3.8 percent by March next year.

The Fed’s latest dot plot shows that nine of its 18 committee members assessed the target cash rate midpoint between 3.875% and 4.375% by the end of 2023.

This suggests that market prices may be too optimistic in the face of the Fed’s resolve to rein in inflation, which has shown some signs of cooling but still hit 8.5 percent in the US in July.

The wild card remains oil price volatility given the commodity’s significant influence on headline inflation and consumer confidence as Europe’s energy costs soar due to the war in Ukraine.

Bond yields have reversed as a traditional signal of a recession, but oil prices have yet to reverse as Russia wages war in Ukraine. AFR

Elsewhere, two-year US Treasuries now offer a higher yield of 3.42 percent than 10-year US Treasuries at 3.1 percent. This suggests that bond markets expect an economic contraction imminent, which may reduce demand for oil.

Exxon Mobil and Chevron partly top Goldman’s short list by virtue of their inflated market capitalizations of $398 billion and $312 billion, respectively, although the actual percentage of their outstanding shorts is not that high. Occidental Petroleum has a significant 7 percent of its short market capitalization equivalent to a $4 billion cash exposure.

Semiconductor Ratings

Hedge funds are tagging US computer chipmakers for share price declines more aggressively in terms of percentage of vouchers outstanding.

According to Goldman research, seven of the 21 shortest stocks by cash value are in the semiconductor space. Number one is Nvidia, the market favorite.

The semiconductor giant has a market value of $395 billion with $6.1 billion of its shares shorted.

For the June quarter, Nvidia posted a 19% quarter-on-quarter drop in sales in an alarming result attributed to a slowdown in the gaming channel as consumers and industry cut spending on computing hardware.

Other semiconductor stocks among the shortest by cash value include Texas Instruments, KLA Corp, Broadcom, Intel Corp, Qualcomm and Micron Technologies.

In Australia, hedge funds are holding firm to bet against frothy valuations in the technology and e-commerce sectors as rising interest rates reduce the present value of their future cash flows.

Afterpay owner Block had 10.7 percent of his ASX bond outstanding as of August 28. Seven months ago, only 1.29 percent of his bond was short.

Other companies vulnerable to rising borrowing costs, such as Zip Co, continue to lead aggressive short positions. Zip last shorted 9.6 percent of its scrip, with shares already down 88 percent during a 12-month horror.

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