Monday, April 03, 2006
Run On Krona 'Tip Of The Iceberg'
The Guardian has this update on Iceland. "It may just be a chilly island close to the Arctic Circle with a population barely above 300,000 and fish its main export, but it could end up cutting the value of your home and your share portfolio. Events in and around the Icelandic economy, culminating last Thursday in a further interest rate rise from its central bank, may be the first sign of problems in global financial markets with unpleasant consequences for all of us."
"The crisis in Iceland is not about to bring the world economy crashing down. It is too small. But the run on its currency and that of New Zealand could be warning signs that the world ignores at its peril. 'It is possible that Iceland is the tip of the iceberg, the first domino to fall, albeit a very small one,' says Julian Jessop, chief international economist at the consultancy Capital Economics in London."
"Iceland, an open economy with a freely floating currency, has..borrowed heavily and pushed up the housing market. The economy expanded a hefty 8% in 2004 and 5.5% last year. It has also pushed up inflation, which is at 4.5%, nearly double the central bank target of 2.5%."
"In response, the central bank has slammed on the monetary brakes, pushing rates up by more than six percentage points in less than two years to an eye-watering 11.5%. It hinted last week that further rises lie ahead."
"The rises have been less to do with the domestic economy than with preventing a run on the Icelandic krona. The krona has fallen 10% in recent weeks, threatening to further push up inflation because of rising import prices. The reason all of this matters is that Iceland, like many small or 'emerging' economies, has attracted inflows of speculative money borrowed in Japan or the eurozone at very low interest rates and invested in Iceland where rates have been much higher. These are known as 'carry' trades."
"The Bank of England has repeatedly warned over the past year or two that the low interest rates around the world were driving an unhealthy 'search for yield' among investors not conscious enough of risk."
"Bond yields have begun to rise in response to higher interest rates in the US and eurozone, as well as an announcement from Japan's central bank that it is to end its policy of flooding markets with liquidity and eventually raise interest rates from zero. Investors seem to be waking up to the fact that the era of super-cheap money of the past five years is drawing to a close."
"As a result, carry trades are less attractive, and some investors are starting to fret about their riskier investments, unwinding some, such as those in Iceland. Hence the fall in the krona. The problem for the Icelandic central bank is that its attempts to prevent a currency crash risk tipping the economy into recession."
"That would be tough for Icelanders but could also spell wider problems. If investors keep unwinding carry trades, bond yields globally could rise much further, which could push down the prices of assets such as houses or shares. 'The strange thing is that Iceland could eventually trigger a sharp slowdown in Britain's housing market,' says Mr Jessop."
"The crisis in Iceland is not about to bring the world economy crashing down. It is too small. But the run on its currency and that of New Zealand could be warning signs that the world ignores at its peril. 'It is possible that Iceland is the tip of the iceberg, the first domino to fall, albeit a very small one,' says Julian Jessop, chief international economist at the consultancy Capital Economics in London."
"Iceland, an open economy with a freely floating currency, has..borrowed heavily and pushed up the housing market. The economy expanded a hefty 8% in 2004 and 5.5% last year. It has also pushed up inflation, which is at 4.5%, nearly double the central bank target of 2.5%."
"In response, the central bank has slammed on the monetary brakes, pushing rates up by more than six percentage points in less than two years to an eye-watering 11.5%. It hinted last week that further rises lie ahead."
"The rises have been less to do with the domestic economy than with preventing a run on the Icelandic krona. The krona has fallen 10% in recent weeks, threatening to further push up inflation because of rising import prices. The reason all of this matters is that Iceland, like many small or 'emerging' economies, has attracted inflows of speculative money borrowed in Japan or the eurozone at very low interest rates and invested in Iceland where rates have been much higher. These are known as 'carry' trades."
"The Bank of England has repeatedly warned over the past year or two that the low interest rates around the world were driving an unhealthy 'search for yield' among investors not conscious enough of risk."
"Bond yields have begun to rise in response to higher interest rates in the US and eurozone, as well as an announcement from Japan's central bank that it is to end its policy of flooding markets with liquidity and eventually raise interest rates from zero. Investors seem to be waking up to the fact that the era of super-cheap money of the past five years is drawing to a close."
"As a result, carry trades are less attractive, and some investors are starting to fret about their riskier investments, unwinding some, such as those in Iceland. Hence the fall in the krona. The problem for the Icelandic central bank is that its attempts to prevent a currency crash risk tipping the economy into recession."
"That would be tough for Icelanders but could also spell wider problems. If investors keep unwinding carry trades, bond yields globally could rise much further, which could push down the prices of assets such as houses or shares. 'The strange thing is that Iceland could eventually trigger a sharp slowdown in Britain's housing market,' says Mr Jessop."
# posted by Ben Jones @ 8:51 AM 
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This is interesting because currency crunches can start just like this. In 1997, my engineer brother was working in Thailand. He sent me an email about 'a lot of panic' among local currency traders and banks. A month later most of the 'Asian financial crisis,' as it became known, was underway.
http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B6E5DEDFC%2D8379%2D4875%2D87DC%2D831770AC5A2C%7D&source=blq%2Fyhoo&dist=yhoo&siteid=yhoo&print=true&dist=printTop
sorry.
ETF in the oil patch
First fund tied to crude on deck, pending SEC approval
By John Spence, MarketWatch
Last Update: 2:43 PM ET Mar 29, 2006BOSTON (MarketWatch) -- The American Stock Exchange plans to introduce the first U.S.-listed oil exchange-traded fund next week pending final regulatory approval from the Securities and Exchange Commission.
The ETF, called United States Oil Fund LP, is set to launch on Monday and trade under the symbol "USO." It will be managed by commodity-pool operator Victoria Bay Asset Management LLC, according to a bell-ringing ceremony invitation sent to journalists by the Amex.
The fund is designed to track crude-oil prices by investing in energy derivative instruments.
The ETF would represent the first time individual investors would have a convenient, liquid vehicle for taking positions in crude oil itself, rather than investing in the shares of energy companies or mutual funds.
Last July, Victoria Bay Asset Management first filed with regulators for an oil ETF but has since changed the name from New York Oil Fund LP. The initial share price for the renamed U.S. Oil Fund will represent the closing price of near-month oil futures contracts on the New York Mercantile Exchange, according to the latest filing.
The fund's investment objective is for shares to reflect the performance of the spot price of West Texas Intermediate (WTI) light, sweet crude oil delivered to Cushing, Oklahoma, minus expenses. It will invest in energy futures contracts, cash-settled options and other instruments to achieve the oil exposure, and will also hold short-term Treasuries.
The ETF is structured as a commodity pool rather than a mutual fund registered under the Investment Company Act of 1940.
Since ETFs trade on exchanges like stocks, the oil fund would allow investors to take a long position in the commodity, as well as hedge against losses by going short.
Not including brokerage or commission costs, the ETF will have a management fee of 0.5% of assets, according to the filing.
Macro Securities Depositor LLC also has an oil ETF currently in registration, and there are already oil ETFs trading on overseas exchanges in London and Mexico.
Keen interest in fund expected
Morgan Stanley analyst Paul Mazzilli said Tuesday the U.S. Oil Fund ETF appears designed similarly to the first broad-based commodities ETF to use derivatives launched last month, Deutsche Bank Commodity Index Tracking FundCreate alert
Also structured as a commodity pool rather than a registered investment company, the Deutsche Bank offering uses futures and "rolls" them periodically to maintain exposure to the commodities. It holds U.S. Treasury bills as collateral, which also provide a yield which offsets expenses.
Mazzilli expects the fund will be successful as the first U.S.-listed oil ETF, but doubts it will experience the same fanfare as the first gold ETF, $6.1 billion StreetTracks Gold TrustAnalyst
Other analysts agreed there could be keen interest in the oil ETF given crude's rise the past few years.
Although there are futures contracts based on oil, an ETF makes the commodity more accessible for average investors, said Dan Culloton, analyst at investment research firm Morningstar Inc.
Some investors use small amounts of commodities to diversify their stock and bond portfolios, but Culloton advised caution about leaping into oil since prices are notoriously difficult to forecast.
"There's a history of investors jumping into asset classes at their peak, so it's better to temper expectations and not to expect recent returns will continue forever," he said. "Will investors be as excited about the diversification benefits when oil is falling, and stick with it?"
Additionally, Culloton said he expects the oil fund will be less tax efficient than stock ETFs because of the tax treatment of capital gains on futures contracts.
Alex Reiss, vice president of closed-end funds and ETF research at Ryan Beck & Co., said he sees heavy demand for an oil ETF from investors who want to hedge their portfolios against geopolitical risks in the Middle East. Interest in oil has been high with some analysts predicting prices will continue to climb on supply and demand issues, he added.
However, Reiss noted "oil prices are very volatile and investors shouldn't overly concentrate their portfolios in one asset class or fund."
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ETF in the oil patch
First fund tied to crude on deck, pending SEC approval
By John Spence, MarketWatch
Last Update: 2:43 PM ET Mar 29, 2006BOSTON (MarketWatch) -- The American Stock Exchange plans to introduce the first U.S.-listed oil exchange-traded fund next week pending final regulatory approval from the Securities and Exchange Commission.
The ETF, called United States Oil Fund LP, is set to launch on Monday and trade under the symbol "USO." It will be managed by commodity-pool operator Victoria Bay Asset Management LLC, according to a bell-ringing ceremony invitation sent to journalists by the Amex.
The fund is designed to track crude-oil prices by investing in energy derivative instruments.
The ETF would represent the first time individual investors would have a convenient, liquid vehicle for taking positions in crude oil itself, rather than investing in the shares of energy companies or mutual funds.
Last July, Victoria Bay Asset Management first filed with regulators for an oil ETF but has since changed the name from New York Oil Fund LP. The initial share price for the renamed U.S. Oil Fund will represent the closing price of near-month oil futures contracts on the New York Mercantile Exchange, according to the latest filing.
The fund's investment objective is for shares to reflect the performance of the spot price of West Texas Intermediate (WTI) light, sweet crude oil delivered to Cushing, Oklahoma, minus expenses. It will invest in energy futures contracts, cash-settled options and other instruments to achieve the oil exposure, and will also hold short-term Treasuries.
The ETF is structured as a commodity pool rather than a mutual fund registered under the Investment Company Act of 1940.
Since ETFs trade on exchanges like stocks, the oil fund would allow investors to take a long position in the commodity, as well as hedge against losses by going short.
Not including brokerage or commission costs, the ETF will have a management fee of 0.5% of assets, according to the filing.
Macro Securities Depositor LLC also has an oil ETF currently in registration, and there are already oil ETFs trading on overseas exchanges in London and Mexico.
Keen interest in fund expected
Morgan Stanley analyst Paul Mazzilli said Tuesday the U.S. Oil Fund ETF appears designed similarly to the first broad-based commodities ETF to use derivatives launched last month, Deutsche Bank Commodity Index Tracking FundCreate alert
Also structured as a commodity pool rather than a registered investment company, the Deutsche Bank offering uses futures and "rolls" them periodically to maintain exposure to the commodities. It holds U.S. Treasury bills as collateral, which also provide a yield which offsets expenses.
Mazzilli expects the fund will be successful as the first U.S.-listed oil ETF, but doubts it will experience the same fanfare as the first gold ETF, $6.1 billion StreetTracks Gold TrustAnalyst
Other analysts agreed there could be keen interest in the oil ETF given crude's rise the past few years.
Although there are futures contracts based on oil, an ETF makes the commodity more accessible for average investors, said Dan Culloton, analyst at investment research firm Morningstar Inc.
Some investors use small amounts of commodities to diversify their stock and bond portfolios, but Culloton advised caution about leaping into oil since prices are notoriously difficult to forecast.
"There's a history of investors jumping into asset classes at their peak, so it's better to temper expectations and not to expect recent returns will continue forever," he said. "Will investors be as excited about the diversification benefits when oil is falling, and stick with it?"
Additionally, Culloton said he expects the oil fund will be less tax efficient than stock ETFs because of the tax treatment of capital gains on futures contracts.
Alex Reiss, vice president of closed-end funds and ETF research at Ryan Beck & Co., said he sees heavy demand for an oil ETF from investors who want to hedge their portfolios against geopolitical risks in the Middle East. Interest in oil has been high with some analysts predicting prices will continue to climb on supply and demand issues, he added.
However, Reiss noted "oil prices are very volatile and investors shouldn't overly concentrate their portfolios in one asset class or fund."
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