NEW YORK (Reuters) – Alpha Sigma Capital, a U.S.-based digital asset fund, and Transform Ventures, a venture capital firm, will raise $100 million for two new funds focused on the blockchain and so-called decentralized Web 3.0 ventures, Alpha Sigma founder and Chief Executive Officer Enzo Villani said on Wednesday.

Transform Ventures, founded by crypto investor Michael Terpin, also merged some of its assets with Alpha Sigma’s parent to form a new holding company called Alpha Transform Holdings. The latter will oversee the two new funds.

Terpin in 2019 won $75.8 million in a civil judgment against Nicholas Truglia, who was 21 years old at the time and part of a scheme that defrauded Terpin of digital currencies, according to court documents. Truglia along with other participants stole 3 million tokens from Terpin’s cellphone account in early 2018.

The new Alpha Liquid digital assets fund was launched early this month, with an initial investment by Terpin, who made a personal investment in cash, bitcoin and ethereum of $2.65 million, with an option to invest an additional $2.9 million.

The second fund, a closed-end venture capital firm called the Aegean Fund, is still in the process of being established, Villani said.

These new funds have emerged as the cryptocurrency industry faces more intense scrutiny after the high-profile bankruptcy of crypto exchange FTX in November and the collapse of several other market players such as lender Celsius Network.

“The real growth of blockchains and the real growth of Web 3 are starting to happen,” Villani told Reuters in an interview. Web 3.0 refers to the third iteration of the internet in which users interact with data through the use of artificial intelligence and machine learning, among others.

“A lot of things that are happening right now (in the crypto and blockchain space) may be challenging. But I think the industry would be going through these (challenges) anyway,” he added.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Mark Porter)

By Hannah Lang and Anirban Chakroborti

(Reuters) – Crypto-focused bank Silvergate Capital Corp said on Wednesday it planned to wind down operations and voluntarily liquidate after it was hit with losses following the dramatic collapse of crypto exchange FTX, sending its shares down 35% in after-hours trade.

The decision to shutter the bank comes after the company warned last week that it was evaluating its ability to operate as a going concern, disclosing that it had sold additional debt securities this year at a loss and that further losses mean the bank could be “less than well capitalized.”

The dire outcome for La Jolla, California-based Silvergate, one of the crypto industry’s favored banks, shows the extent of the impact on the digital asset industry from the downfall of FTX which filed for bankruptcy in November after failing to cover customer withdrawals.

In a statement, Silvergate said the decision to wind down its bank was “the best path forward” in light of “recent industry and regulatory developments.” Its wind-down and liquidation plan includes full repayment of deposits, the bank added.

Multiple partners of the bank, including high-profile firms such as Coinbase Global Inc and Galaxy Digital, severed ties with Silvergate last week.

After Silvergate’s statement, crypto exchange Coinbase said it has no client or corporate cash at Silvergate, while Binance chief Changpeng Zhao said the company did not have any asset losses at Silvergate.

Silvergate reported a $1 billion loss for the fourth quarter as investors raced to withdraw more than $8 billion in deposits.

Silvergate has retained Centerview Partners LLC as a financial adviser and Cravath, Swaine & Moore LLP as a legal adviser, the bank said in a statement.

Founded in 1988, Silvergate ventured into crypto in 2013. The bank had also operated a mortgage warehouse business, but announced in December that it would be winding down that division, citing the rising interest rate environment and reduction in mortgage volumes.

Last week, Silvergate discontinued the Silvergate Exchange Network, its crypto payments network and one of its most popular offerings. That network enabled round-the-clock transfers between investors and crypto exchanges, unlike traditional bank wires, which can often take days to settle.

While risks of contagion are minimal, given that Silvergate has said it will repay depositors and has performing loans, the loss of the Silvergate Exchange Network is disappointing, said Ram Ahluwalia, the chief executive officer of Lumida Wealth, an investment adviser that specializes in digital assets.

“It’s more of a strategic loss of critical infrastructure for crypto,” he said.

The Federal Deposit Insurance Corp (FDIC) declined comment on Wednesday when asked about the bank’s failure beyond saying that it does not regulate the bank or the holding company. Bloomberg earlier reported the FDIC had been discussing with Silvergate ways to avoid shutdown.

Federal prosecutors in Washington are probing the company and its dealings with FTX and trading firm Alameda Research. In January, three U.S. senators asked Silvergate for details about its risk management and FTX.

In a statement, the California Department of Financial Protection and Innovation, which supervised Silvergate under a state charter, said it was evaluating the bank’s compliance with financial laws, as well as safety and soundness obligations, and was working with its relevant federal counterparts.

More than a trillion dollars in value were wiped out from the crypto sector in 2022 with rising interest rates exacerbating worries of an economic downturn.

After rapid growth in 2020 and 2021, bitcoin – the most popular digital currency by far – fell more than 60% last year, pressuring the digital assets industry.

(Reporting by Hannah Lang in Washington and Anirban Chakroborti in Bengaluru; Additional reporting by Manya Saini and Mrinmay Dey in Bengaluru; Editing by Maju Samuel, Matthew Lewis and Lincoln Feast.)

By Manya Saini

(Reuters) – The once high-flying fintech startups looking to go public will have a hard time attracting investor attention, even though a freeze that has gripped the market for new listings is starting to thaw.

Activities related to initial public offerings (IPO) in the United States came to a standstill for more than a year as the U.S. Federal Reserve’s aggressive monetary-tightening policy sucked out easy money from the system.

The cautious mood in the market has meant that mostly those startups that are backed by solid fundamentals and steady revenue streams have dared to go public, with roughly 24 companies listing their shares this year and about 140 filing for IPOs.

As investor confidence improves, more companies are expected to reignite their IPO plans this year, but fintech firms may opt out of the race as they face a string of worries, including rising cash-burn rate, mounting losses and poor share performance of some of their listed peers.

“We’re still in the early innings of the IPO market’s pick-up. And when IPO activity does resume, we expect fintechs will likely be among the last to rejoin the party,” said Matthew Kennedy, senior strategist at IPO research firm Renaissance Capital.

“I don’t think it would surprise anyone if they all sat out the 2023 IPO market,” Kennedy added.

Digital banking pioneers Chime and Stripe are currently seen as the industry’s top IPO candidates along with investing app Acorns and buy-now-pay-later firm Klarna.

BOOM AND BUST

Fintech apps soared in popularity during the COVID-19 pandemic, as a near-zero interest rate environment helped them offer easy credit to lure consumers who were stuck at home.

Digital payments giants like PayPal Holdings Inc and Block Inc also expanded their buy now, pay later (BNPL) services to appeal to millennials and Gen Z customers. 

But with interest rates at their highest levels since the global financial crisis, apps with huge exposure to subprime borrowers have attracted investor scrutiny, making it tough for such startups to justify higher valuations.

“On the fintech side, it is not one-size-fits-all. Fintechs that have maintained their growth and market share focus may not play well into the current market focus on profitability,” said Rachel Gerring, EY Americas IPO leader, and Mark Schwartz, IPO and SPAC Capital Markets Advisory leader.

They, however, said there were companies in the sector with the scale and cash flow for whom individual circumstances would determine whether to push forward with their IPO plans or opt for a wait-and-see approach.

In the IPO boom of 2021, 20 fintech companies raised a combined $10.93 billion, vastly overshadowing the $144 million that was raised by a lone offering in the following year, according to data from Dealogic.

“The IPO market is not closed, but it’s certainly more valuation and profitability focused,” said David Ethridge, U.S. co-IPO leader at global consulting giant PwC.

Companies looking to list will need to shore up investor confidence in their cost-cutting plans and be transparent with their attempts to lower cash burn, he added.

LACKLUSTRE LISTINGS

Listed fintech companies have failed to largely live up to their shareholders’ expectations as they have steadily booked losses, leading to a string of routs in their shares.

Coinbase, which was valued at $86 billion in its Nasdaq debut in April 2021, now has a market capitalization of about $15 billion.

Robinhood and BNPL lender Affirm Holdings have shed $20 billion each in valuations since going public.

High-growth fintechs were previously valued like tech companies, where valuation was decided as a multiple of sales. But with the tech boom having subsided, they are being evaluated using the playbook investors use for financial firms, where earnings play a crucial role, Renaissance’s Kennedy said.

(Reporting by Manya Saini in Bengaluru; Editing by Anil D’Silva)

By Jorgelina do Rosario

LONDON (Reuters) -China’s pledge to support Sri Lanka’s debt reorganization, a major step for the island nation in securing an IMF lifeline, provides little clarity on how negotiations will unfold or whether this could herald progress for other heavily indebted nations.

Analysts remain cautious on how significant China’s new commitment will be for the country, whose 22 million people urgently need funds from the $2.9 billion International Monetary Fund programme amid shortages of food, fuel and medicines.

Cash-strapped nations such as Zambia and Ghana are also facing talks on reworking debt with Chinese lenders, and Sri Lanka’s negotiations showed that international efforts to standardize some debt rework parameters are failing. China is the biggest bilateral creditor to Sri Lanka, which defaulted on its international debt last year.

The Export-Import Bank of China (EXIM) told Sri Lanka in a letter that it will try to expedite debt talks in the months ahead, in addition to a two-year moratorium secured previously.

The bank also clarified that financial negotiations should remain “between our two sides.”

“It is hard to see whether this is a change in Chinese (or Indian, for that matter) policy towards sovereign restructuring deals going forward or a one-off for this case. My guess: the latter,” said Mitu Gulati, a law professor at Duke University in the U.S.

While Sri Lanka is not part of the Group of 20’s Common Framework debt platform due to its middle-income status, this approach could jeopardize bilateral creditors’ efforts to restructure debt in comparable terms. The Paris Club of creditor nations and India have previously provided financing assurances.

Sri Lanka owed China’s EXIM $4.1 billion, or 11% of the country’s foreign currency debt, at the end of 2022, according to government data.

BOARD APPROVAL VS DEBT DEAL

An executive board approval unlocks IMF financing, though it doesn’t necessarily mean it will expedite debt talks.

“The next step for Sri Lanka will be to turn these financing assurances into a concrete restructuring deal, ideally before the first or second program review, which is something that has proven difficult so far in other country cases,” said Theo Maret, senior research analyst at Global Sovereign Advisory, in Paris.

Zambia’s debt rework is far from over after board approval for a $1.3 billion programme in September, as both bilateral and commercial creditors challenge the IMF’s debt sustainability analysis, a document addressing the debt relief the country needs. The country’s Finance Minister Situmbeko Musokotwane said that progress has been slow, and the outcome is uncertain.

Once the executive board approval is secured, the IMF will publish Sri Lanka’s debt sustainability analysis.

“All eyes will be on the conditionalities imposed under the programme, particularly on the debt restructuring that’s required,” JPMorgan analysts wrote in a note.

Sri Lanka “is significant as an example that not every case is turning into a Zambia-style stalemate but I’d still be cautious in general,” said Sergi Lanau, deputy chief economist at the Institute of International Finance.

“It looks like negotiations will continue to be case by case, without much success at beefing up the common framework to the point that it is a set procedure the next few cases follow,” Lanau added.

(Reporting by Jorgelina do Rosario, editing by Karin Strohecker and Toby Chopra)

By Kantaro Komiya and Eimi Yamamitsu

TOKYO (Reuters) – Japan’s economy narrowly averted a recession in the final months of 2022, barely growing on frail consumption after shrinking in the third quarter, revised data showed, underscoring the challenge for policymakers trying to shore up a wobbly recovery.

Record high inflation and slowing global growth amid sweeping monetary tightening across many countries have undermined the world’s third-biggest economy’s post-pandemic revival, despite relaxation of COVID curbs, energy subsidies and ultra-easy monetary policy.

Businesses, under government pressure to increase wages to boost household consumption, are struggling to motor on in the face of muted demand at a time of crucial spring labour talks.

Japan’s gross domestic product (GDP) expanded by an annualised 0.1% in October-December, against a preliminary estimate of a 0.6% expansion and much lower than economists’ median forecast for a 0.8% rise in a Reuters poll. That followed a revised 1.1% contraction in July-September.

The expansion translates into an almost flat 0.02% quarter-on-quarter change, data released by the Cabinet Office showed, against a preliminary reading and economists’ estimate for 0.2% growth.

“There was a less strong recovery in services (spending), while rising inflation likely curbed consumption as well,” said Wakaba Kobayashi, economist at Daiwa Institute of Research.

Graphic: Japan GDP revised down on weak consumption, https://www.reuters.com/graphics/JAPAN-ECONOMY/GDP/zjvqjyloepx/set.jpg

Private consumption, which makes up more than half of the country’s GDP, grew 0.3%, the data showed, downgraded from an initial estimate of a 0.5% increase.

Spending on services such as restaurants and hotels, as well as goods, were less solid than previously estimated, the data showed.

Capital spending fell 0.5%, unchanged from a preliminary estimate and compared with a median market forecast for a 0.4% contraction, even as Ministry of Finance data last week showed an uptick in manufacturers’ output capacity in the fourth quarter.

Domestic demand as a whole knocked 0.3 percentage point from revised GDP growth, slightly more than initially estimated, while net exports added 0.4 percentage point.

BUMPY RECOVERY

Japan’s economy is being buffeted by slowing overseas demand due to deteriorating global growth, resulting in a record trade deficit and the largest factory output contraction in eight months in January.

Domestic demand is providing some support to the economy thanks to Japan’s relaxation of COVID-19 measures, including a border control easing for international tourists in October, but four-decade-high inflation is undercutting the prospects of a consumption-driven recovery.

In an effort to boost households’ purchasing power, the government and the Bank of Japan (BOJ) are urging firms to hike workers’ wages at the annual “shunto” spring wage negotiations wrapping up this month.

Major companies are set to deliver the largest pay rise in 26 years, but it will likely include just a 1% increase in base pay, casting doubt on whether Japan can achieve the kind of sustained wage gains the central bank sees as key to stably hitting its 2% inflation target.

The BOJ is set to maintain its ultra-easy policy at the two-day rate-review concluding on Friday, the last for governor Haruhiko Kuroda’s 10-year tenure.

The government is looking at additional measures to counter inflation, following a $285 billion fiscal package unveiled in October that has subsidised gasoline and utility costs.

But the weak GDP data, and challenges overseas, point to a bumpy road to recovery for Japan, analysts say.

“Japan’s October-December ended up as a zero-growth, bashing the hopes for a rebound from the July-September contraction,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

“The economy remains in a tough position from April onward with the heightening risk of stalling growth in Europe and North America on relentless monetary tightening.”

(Reporting by Kantaro Komiya and Eimi Yamamitsu; Graphics by Pasit Kongkunakornkul; Editing by Chang-Ran Kim & Shri Navaratnam)

By Xie Yu, Selena Li and Carolina Mandl

HONG KONG/NEW YORK (Reuters) – A new Chinese financial watchdog will help bridge regulatory gaps but analysts and investors say the agency will consolidate power at the top and could introduce more state and party intervention.

In a major shake-up, China will set up the new regulatory body, the National Financial Regulatory Administration (NFRA), according to a proposal that the State Council, or cabinet, presented to parliament on Tuesday.

The watchdog, which will oversee all aspects of China’s $57 trillion financial sector apart from the securities market, should help reduce regulatory overlap especially at the level of local government, analysts say.

The creation of the NFRA “carries an intent to have better oversight of financial institutions and consumer protection, by … bringing all financial activities under supervision,” said Daniel Tu, founder of venture capital Active Creation Capital.

“However, one can interpret it as restructuring the party-state to align with Xi’s objectives.”

President Xi Jinping, who clinched a precedent-breaking third leadership term in October, last week renewed his call for ambitious reforms of Communist Party and state institutions, which analysts see as part of his effort to exert tighter control.

The reform also comes after unprecedented regulatory scrutiny of a string of private enterprises in the last couple of years by multiple watchdogs after years of laissez-faire regulatory approach.

Overall, the proposal is meant to “improve financial regulation coordination to enhance financial stability”, a key policy focus in the next few years, Goldman Sachs said in a research note on Wednesday.

The new regulator will replace the banking and insurance sector watchdog and bring supervision of the industry into a body directly under the State Council, or cabinet.

There are also plans, sources have said, for the revival of another high-level financial watchdog which is expected to be directly under central party leadership.

It is not clear how that watchdog, being revived after two decades, will align with the NFRA.

That party-affiliated watchdog is expected to be revealed as part of the party’s institutional reform plan, which is due out shortly after the conclusion of the parliamentary session on Monday.

The reform plan and appointments of new leaders to key government institutions, including the NFRA, should offer more clues as to regulatory policies, Goldman Sachs said in its research note.

(Graphic: Jefferies China regulatory diagram, https://www.reuters.com/graphics/CHINA-PARLIAMENT/REGULATION/zgvobndmgpd/JefferiesDiagram.jpg)

‘ENHANCING CENTRALISATION’

In its reform proposals presented in parliament, the State Council said the changes were meant to “deepen reforming local financial regulatory systems” by “enhancing centralised management of financial affairs”.

Under the changes, the central bank will focus on conducting monetary policy and macro-prudential supervision, while the NFRA will focus on micro-level activities, analysts at CITIC Securities said in a research note.

Kevin Philip, partner at Bel Air Investment Advisors in Los Angeles, managing $9.5 billion in assets, said the overhaul was a step towards “centralisation” of regulations, and considered it reasonable from a debt control perspective.

Some investors, however, are concerned that the regulatory power reshuffle means tighter government control, which may bring more interference or crackdowns on financial activity, particularly in the private sector.

“My sense is that this could still be an issue of concern for investors, especially foreign investors,” said Tara Hariharan, head of global macro research at NWI Management, a New York-based hedge fund focused on emerging markets.

Comprehensive financial oversight could well benefit policy coordination and aid the world’s second-largest economy in supporting growth and credit creation while keeping asset bubbles at bay, she said.

“However, investors may fear such regulatory consolidation as risking further crackdowns on ‘disorderly expansion of capital’ of the sort that the property sector and the tech platforms have already faced,” she added.

($1 = 6.9730 Chinese yuan renminbi)

(Reporting by Xie Yu, Julie Zhu, Selena Li in Hong Kong, Ziyi Tang in Beijing, Davide Barbuscia and Carolina Mandl in New York; Editing by Sumeet Chatterjee, Robert Birsel)

(Reuters) -Citigroup Inc’s chief financial officer Mark Mason said that the lender would adjust its investment banking headcount as necessary, Bloomberg News reported on Wednesday.

Citigroup, which has been boosting its investment banking division by hiring for sectors including energy and biotechnology over the years, is considering changing the pace of some of its investments following the recent drought in dealmaking, the report added, citing Mason’s interview with Bloomberg Television.

Citigroup, when asked about the bank’s headcount plans, did not give details beyond Mason’s comments in the Bloomberg interview.

The recent announcement follows the bank’s plan to lay off less than 1% of staff, according to a Reuters report from last week, citing people familiar with the matter.

The focus on the strength of investment banking teams follows a similar attitude across other major investment banks including Goldman Sachs and Morgan Stanley, which have also cut jobs following a slowdown in dealmaking from the ensuing market rout and recessionary fears.

(Reporting by Anirban Chakroborti in Bengaluru; additional reporting by Juby Babu; Editing by Rashmi Aich and Eileen Soreng)

By Andrea Shalal and David Shepardson

WASHINGTON (Reuters) -U.S. President Joe Biden and European Commission President Ursula von der Leyen are expected to agree on Friday to begin negotiations on ensuring free-trade agreement-like status for the European Union, two sources familiar with the plans said on Wednesday. 

The leaders are set to meet in Washington on Friday.

Reuters reported last week that the United States and EU were working to make European minerals eligible for tax credits under the $430 billion U.S. Inflation Reduction Act (IRA), citing a senior EU official.

That law requires rising percentages of battery minerals to come from the United States or a Free Trade Agreement (FTA) partner.

A U.S. Treasury spokesperson said the department, which oversees the electric vehicle (EV) tax credits at the heart of the dispute, would evaluate any newly negotiated agreements to ensure they meet the critical minerals requirement of the tax credit during the rulemaking process.

“Given the extremely high concentration of Chinese control over critical mineral extraction globally, strengthening our supply chains for critical minerals along with like-minded partners is vital for the growth of the clean energy economy,” the spokesperson said.

Working with allies to reduce U.S. reliance on China for critical minerals would aid U.S. energy and economic security, the spokesperson added.

Up to $3,750 per vehicle of the available tax credits relate to critical minerals for batteries, taking effect when the U.S. Treasury issues guidance, which is expected later this month.

The EU, South Korea, Japan and other U.S. allies have harshly criticized the IRA’s provision requiring EVs to be assembled in North America to qualify for consumer EV tax credits.

But the EU in December praised a U.S. Treasury Department decision to allow EVs leased by consumers to qualify for up to $7,500 in commercial clean vehicle tax credits.

(Reporting by Andrea Shalal and David Shepardson; Editing by Chris Reese and Jamie Freed)

(Reuters) -Opko Health Inc said on Wednesday it signed a deal with Merck & Co Inc potentially worth up to $922.5 million for its experimental Epstein-Barr virus vaccine.

Shares of Opko rose as much as 24%, before paring gains to trade 9.4% higher at $1.16.

Merck will take over the clinical and regulatory activities related to the vaccine, as well its commercialization once the drugmaker files a joint application with Opko unit ModeX Therapeutics to test it in humans, the company said.

Opko will receive an upfront payment of $50 million and is eligible for milestone payments of up to $872.5 million, plus royalties, on global sales.

There is currently no vaccine for the Epstein-Barr virus, which is the leading cause of mononucleosis, or mono, commonly called the “kissing disease”.

(Reporting by Aditya Samal in Bengaluru; Editing by Pooja Desai)

By Iain Withers

LONDON (Reuters) -Britain’s auditing watchdog has imposed a 7.5 million pound ($8.9 million) penalty on PwC for “serious breaches” found in audits of engineer Babcock International, the regulator said on Wednesday.

The Financial Reporting Council (FRC) said the penalties related to failings on audits of Babcock’s accounts up to the end of March 2017 and 2018, as well as one of its subsidiaries in the latter year.

The fine was discounted by 25% to 5.6 million pounds due to early resolution, the regulator said.

Auditing firms have faced tighter political scrutiny over the quality of their work in recent years, following a slew of high profile accounting scandals linked to some of Britain’s best-known companies including retailer BHS and builder Carillion.

The FRC said breaches identified on PwC’s audits of Babcock included repeated failures to challenge management and obtain sufficient appropriate evidence.

The firm also showed a lack of competence, care and diligence, the regulator said, citing one example where it found no evidence the audit team had read a 30-year contract with lifetime revenue of 3 billion pounds written in French.

In this case, the audit team neither possessed French language skills nor obtained a translation of the contract, the FRC said.

“We’re sorry that the work in question was not of the standard required and that we demand of ourselves,” a PwC spokesperson said.

Babcock, which was not a party to the FRC investigation, said it had conducted a review of its contracts and balance sheet which reported initial findings in April 2021, resulting in a write-off of around 2 billion pounds.

“This established an appropriate baseline for the financial performance of the group,” a Babcock spokesperson said.

Two PwC partners – Nicholas Campbell Lambert and Heather Ancient – were also fined 200,000 pounds and 65,000 respectively, discounted to 150,000 pounds and 48,750 pounds respectively.

The FRC’s investigation into PwC’s statutory audits of the Babcock group financial statements for 2019 and 2020 is ongoing.

($1 = 0.8460 pounds)

(Editing by Sinead Cruise and Jason Neely)

By Sinéad Carew and Shristi Achar A

(Reuters) – The S&P 500 index closed slightly higher while the Dow dipped on Wednesday as investors grappled with mixed messages from Federal Reserve Chair Jerome Powell and U.S. economic data ahead of upcoming labor and inflation reports that are expected to determine the central bank’s future rate hiking path.

In his second day of testimony to Congress on Wednesday, Powell reaffirmed his message from Tuesday, of higher and potentially faster interest rate hikes. However, he suggested that the next rate hike decision hinges on data to be issued before the Fed’s March meeting.

Stocks had fallen more than 1% on Tuesday after Powell’s comments led investors to dramatically increase bets on a 50-basis-point hike in March compared with the previous widely held expectation for a 25-basis-point hike before Powell spoke.

Data released on Wednesday did little to ease concerns about higher rates as it showed that U.S. private payrolls increased more than expected in February.

Another report showed U.S. job openings fell less than expected in January and data for the prior month was revised higher, pointing to persistently tight labor market conditions fueling concerns that this would keep the Fed on track to raise interest rates for longer.

“Investors are digesting Fed Chair Powell’s testimony to Congress and data indicating that the job market remains pretty hot,” said Tom Hainlin, national investment strategist at U.S. Bank Wealth Management, in Minneapolis.

Hainlin sees Friday’s non-farm payroll report and next week’s inflation readings for February as the keys to whether the next rate hike will be 25 or 50 basis points.

Traders kept increasing bets for a Fed rate hike of 50 basis points later this month, with fed funds futures recently showing a roughly 80% chance for such a hike, up from about 70% on Tuesday and 31% on Monday before Powell’s first testimony, according to CME Group’s FedWatch tool.

At the end of the session, the Dow Jones Industrial Average had fallen 58.06 points, or 0.18%, to 32,798.4; the S&P 500 closed up 5.64 points, or 0.14%, at 3,992.01; and the Nasdaq Composite added 45.67 points, or 0.4%, to end at 11,576.00.

Among the S&P’s 11 major sectors, seven closed higher. Energy, down 1%, was the biggest loser, as oil prices fell. Leading gains was real estate, which closed up 1.3%.

Technology was the second biggest gainer, up 0.8%, helping Nasdaq outperform the other major indexes.

Tesla Inc slid 3% after the U.S. auto safety regulator said it was opening a preliminary investigation into 120,000 Model Y 2023 vehicles following reports about steering wheels falling off while driving.

Occidental Petroleum Corp gained 2% after Warren Buffett’s Berkshire Hathaway Inc increased its stake in the oil company to about 22.2%.

Declining issues outnumbered advancers on the NYSE by a 1.02-to-1 ratio; on Nasdaq, a 1.14-to-1 ratio favored decliners.

The S&P 500 posted two new 52-week highs and 11 new lows; the Nasdaq Composite recorded 48 new highs and 170 new lows.

On U.S. exchanges 10.3 billion shares changed hands compared with the 10.90 billion average for the last 20 sessions.

(Reporting by Sinéad Carew in New York, Shristi Achar A, Sruthi Shankar and Bansari Mayur Kamdar in Bengaluru, graphic by Noel Randewich, additional reporting by Amruta Khandekar; Editing by Vinay Dwivedi, Sriraj Kalluvia and Richard Chang)

By Carolina Mandl

NEW YORK (Reuters) – Hedge funds are increasingly using more leverage to make wagers on the stock market this year, but they remain less inclined to bet on the market direction due to heightened macroeconomic uncertainties.

Investors are focused on the economic picture as they try and assess the risk of upcoming recession as the U.S. Federal Reserve tries to bring inflation under control by hiking rates aggressively. On Wednesday, Federal Reserve’s chair Jerome Powell said future interest rates hikes could go higher than market participants anticipated to fight inflation.

Hedge funds’ gross exposure, or the sum of long and short positions – bets shares will rise and fall – as a percentage of their assets under management, last week reached peak levels for the last one year according to Goldman Sachs’ prime services weekly report.

Gross exposure went up 2.5 percentage points for the period between Feb. 24 and Mar. 2, to 241% of assets, the report showed.

However, their long wagers minus short ones, known as net exposure – a measure of directional risk appetite – is close to a year low of 66%, Goldman Sachs showed. This illustrates that portfolio managers have little bias on overall market direction.

Hedge funds’ more market neutral approach comes as market participants are trying to guess how high interest rates will get, for how long and when inflation will show consistent signs of decline – and its impact on the stock market.

Goldman Sachs, one of the biggest prime brokers, uses its clients’ database to capture trends. Although the report does not reflect the entire $4 trillion industry, other market participants have expressed a more cautious approach.

Volatility has caught hedge funds off-guard. In the beginning of the year, an unexpected rally forced hedge funds betting against stocks to abandon those trades at the fastest pace since 2015. The S&P 500 went up roughly 9% at its peak in February 2, but trimmed gains to 4% now.

“Investors are not in full risk-on mode,” said Eamon McCooey, head of prime services at Wells Fargo, adding his clients’ dry powder are close to peak levels.

Long-short hedge fund Anson Funds, with $1.5 billion in assets under management, is roughly neutral, with shorts and longs matching off, portfolio manager Moez Kassam said. He said the fund is keeping cash and unused limits higher than in previous years due to economic uncertainties.

“Our macro view centers on inflation,” he said. “It will stay elevated longer than most expect.”

Higher interest rates are also forcing investors to make until recently unthinkable calculations, said Rob Christian, chief investment officer at hedge fund solutions group K2 Advisors, which manages a fund of hedge funds, as cash may provide a good return.

“Our hedge funds in general have been taking less risk,” he said. “Now two-year Treasury is a very attractive asset class relative to everything.”

(This story has been corrected to fix Rob Christian’s position as chief investment officer, not co-head of research and investment management, in paragraph 12)  

(Reporting by Carolina Mandl, in New York; editing by Megan Davies and Chizu Nomiyama)