STOCKS | Bank of America: Hedge Funds Resume Shorting Rate-Sensitive Stocks as Inflation Revives Rate-Hike Bets

Above-forecast U.S. inflation and weak existing-home sales have renewed concerns that interest rates may stay high for longer. According to Sina Finance, Bank of America's trading desk said hedge funds previously forced to close short positions during the stock-market rebound are rebuilding bets against rate-sensitive stocks. Traders said the shift could mark the start of a new wave of short selling. John Egan, Bank of America's head of global short analysis and tactical solutions, said heavily shorted stocks had underperformed the broader market, creating an opening for investors to rebuild short positions. From mid-August to mid-October this year, some U.S. stock sectors came under pressure after the Federal Reserve sent hawkish signals at the Jackson Hole economic symposium and rising oil prices intensified inflation concerns. Heavily shorted consumer discretionary stocks fell an average of 16.5% over those two months. From mid-October to the first week of November, however, those stocks rebounded about 20%, prompting short sellers to take profits. The covering developed into a short squeeze, with investors buying shares to close positions and pushing prices higher. Some stocks returned to levels seen when short positions were first established in August. The U.S. Consumer Price Index released Tuesday evening (UTC+8) exceeded market expectations, while existing-home sales were weak. On the CPI release day, heavily shorted consumer discretionary stocks fell an average of 2.28%, compared with a 0.38% decline in the S&P 500. Bank of America said renewed short positions do not necessarily indicate a broad bearish turn. Some hedge funds are shorting companies exposed to high borrowing costs and weaker consumer demand while allocating funds to technology stocks. Egan said investors may rebuild short positions they had previously closed and may also buy stocks sold off during the broader market pullback.