Karsbшl on Iceland: “They’re Killing the Economy”

Karsbшl on Iceland: “They’re Killing the Economy”

Following the Icelandic central bank’s surprise decision to hike rates to 13 percent, David Karsbшl says continued hikes could plunge the “geyser” economy into full-blown recession


Speaking to CNBC Europe’s \"Closing Bell\" yesterday on the Icelandic central bank’s decision to continue hiking interest rates to 13 percent, Saxo Bank market strategist David Karsbшl declared \"They’re killing the economy.\" Karsbшl cited Iceland’s miniscule economy and the fact that a large chunk of its current inflationary woes stem from higher import prices, and said it would have been prudent for the bank to wait out the current inflationary flare-up. Karsbшl said there are already plenty of indications that Iceland’s economy will cool on its own already next year – to wit, the country’s new Prime Minister, Geir Haarde, is already planning measures to abolish the country’s Fannie Mae-like institutions, which have been a key driver behind swelling housing prices in the country. Money supply growth is already showing significant signs of cooling in Iceland, and this year’s Fitch downgrade of the Icelandic economy is weighing heavily as well. \"There’s a long lag period for [the effects of] all of these measures, and many analysts believe in a cool-down for Iceland as soon as 2007. I really think this rate hike could spark a recession.\" Regarding the outlook for the Icelandic krona, Karsbшl says he expects an initial spike for ISK on favorable rate differentials, followed by a dramatic sell-off if the Icelandic central bank continues on its current course of action.

Large cap-industrials to outperform consumer-relateds
After yesterday’s \"vigilant\" rhetorical redux from ECB chief Jean-Claude Trichet, look for the European rate outlook to steer developments on key equity markets. As market strategist Torben Krogh Nielsen explains, \"The market is divided right now between companies that are benefiting from the capex cycle – that is, large-cap industrials – which will outperform, and companies that are closer to consumers and/or rate-sensitive, which will underperform.\" Krogh Nielsen is particularly cautious on banks and retailers today, and says the best risk-reward setup for traders is through short positions – longs are generally to be avoided except in the case of large-cap industrials.



Silver in focus after ETF build
In futures news, Saxo Bank sales trader Alan Plaugmann is guardedly bullish on metals, but says silver is the metal to play today, following news of a build in the silver ETF of some 4.5 percent. A break of resistance at 11.701 in silver today should spark volatile upward action. In general, Plaugmann looks to continued USD weakness as the primary indicator for price action in metals. Yesterday’s energy inventories showed a build in gasoline and a slight draw in crude. While the numbers sparked an initial sell-off, traders still in thrall of geopolitical concerns saw this as a prime opportunity to underpin long positions, and crude oil recouped all losses shortly thereafter. For today, WTI is expected to trade against resistance at 75.00: an excellent point for intra-day selling against a move towards 73.95.



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