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FEBRUARY 16, 2024

SURGE SPARKS CONCERNS

In January, wholesale prices in the U.S. exceeded expectations, leading to concerns about inflation. The producer price index (PPI), which measures the prices received by domestic producers, rose by 0.3%, surpassing the anticipated 0.1% increase. Additionally, the core PPI, which excludes food and energy, increased by 0.5% against an expected 0.1% gain. These numbers, along with the latest CPI of 3.1%, prompted worries about market stability and resulted in a re-evaluation of expectations for potential interest rate cuts, as it seems like inflation persisted. Moreover, following the PPI report, with the 10-year Treasury yield reaching 4.322%, exceeding the closely-watched 4.3% mark.

REMARKABLE TURNAROUND

Coinbase, the largest U.S. based cryptocurrency exchange, made a notable headline with its shares jumping by 12% after recording its first profit in two years. In its latest earnings report, Coinbase reported a net income of $273 million for the fourth quarter of 2023, marking a positive turnaround in its financial performance. This news came as the net revenue surged to $905 million, representing a nearly 50% increase from the previous year. The surge in interest in cryptocurrencies, coupled with the approval of the first spot bitcoin exchange-traded funds (ETFs), drove significant demand for digital assets, which contributed to Coinbase’s strong performance. Furthermore, the company observed a boost in consumer trading revenue, which reached $493 million, marking a substantial 79% increase from the previous quarter. Moreover, Coinbase’s resilient fee structure played a crucial role in accommodating higher volumes, without the need for fee adjustments. These results were also influenced by volatility in crypto prices and expectations for improved macroeconomic conditions in 2024.

PRICES ON THE RISE

Gasoline prices in the U.S. have sharply risen to an average of $3.28 per gallon. This hike has increased by 11 cents within just a week, and it can be attributed to the usual surge in demand as winter winds down and gas stations transition to more expensive summer fuel. In addition, unexpected refinery outages, notably in the Midwest, have contributed to the spike. Moreover, while the current outlook indicates continued price increases, experts project a slower pace, with estimates placing the national average between $3.50 and $3.75 per gallon for the summer. This is relatively lower than the unprecedented spike above $5 experienced in June 2022. Thus, despite the surge, today’s prices are still lower than a year ago. Nonetheless, there are concerns that geopolitical tensions or supply disruptions could push prices even higher.

SHIFTING PREFERENCES

More hedge funds are changing their performance fee conditions as a survey by Barclays Plc revealed that 67% of investors now prefer a hurdle rate, meaning the fund must perform above a certain level before they can charge incentive fees. Funds are now more willing to offer hurdle rates, based on a poll of around 310 asset allocators. Moreover, with relatively low-risk products providing decent returns in a high-rate environment, hedge funds are facing pressure from investors on fees and expenses. In 2023, the average hedge fund returned about 8%, while the risk-free rate was about 5%. However, while some funds were able to keep most of their profits as fees, investors withdrew over $100 billion from the industry for the second consecutive year in 2023. Furthermore, Investors are increasingly seeking cash-based hurdle rates, with around half actively pursuing them, and this is a high priority for nearly a third of investors making new allocations this year. Consequently, investors now expect higher returns from hedge funds, and despite these pressures, a large majority of investors plan to allocate to hedge funds in 2024, although the portion going to existing relationships is relatively low at 33%.

INTERNATIONAL NEWS

European shares have rallied, concluding a week marked by strong earnings and speculation of potential rate cuts by the European Central Bank. The pan-European STOXX 600 index surged to a two-year high, bolstered by a 0.5% increase, with miners spearheading the gains with a 2.2% jump, while the UK’s FTSE 100 outperformed regional peers, climbing by 0.8% buoyed by a greater-than-anticipated 3.4% rise in British retail sales in January. In addition, the comments from Francois Villeroy de Galhau, a member of the ECB and head of the Bank of France, which favored an early interest rate cut in 2024, further contributed to upbeat investor sentiment. Moreover, shares of Metso, a Finnish mining equipment manufacturer, soared over 7% following an impressive fourth-quarter profit and an optimistic outlook for its aggregates unit.

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