When South Korean housewife Song Mi-kyung invested in an exchange-traded fund linked to oil prices five years ago, she thought she was on to a sure thing.
But Ms Song is among the retail traders that have been hit by this week’s crash in oil prices after investing in the country’s booming market for quirky, derivative-linked products.
ETFs such as the one Ms Song bought are so-called structured products — a sector where investment has grown by 500 per cent over the past 10 years. The market is valued at about $87bn (Won104tn). The instruments are often marketed at pensioners seeking a chunkier yield on their savings and include roughly $1.5bn in derivatives tied to the price of oil.
In less volatile market conditions, some structured notes can perform like bonds, paying out a single-digit coupon until maturity. But investors risk losing their entire principal if the price of the underlying asset — such as oil — falls below a threshold.
Ms Song’s nightmare scenario materialised this week when Saudi Arabia launched an oil price war, prompting the price of crude oil to crash by 30 per cent in a single day.
“I invested about Won19m ($16,000) about five years ago when oil prices were around $40-$50,” she said. “I thought that I could easily make money because almost everyone at that time was expecting oil prices to go up.” She added that her principal is now worth about 60 per cent less compared with when she first invested. Ms Song did not wish to provide the name of the product she invested in or the company that issued it.
Analysts have previously warned that the derivative products favoured by South Korean investors can worsen market turbulence during sudden downturns.
South Korea’s financial watchdog is investigating whether there has been any “illegality involved” in the sale of such products, according to a person with direct knowledge of the matter. “We are looking closely into this as a drop in oil prices increases the chance of investors suffering losses from these oil-linked [notes].”
There is not much we can do to stem investor losses because oil prices are beyond our control
Many investors have yet to cash out, instead hoping for an oil price recovery before their products mature. A sudden jump in redemptions could cause problems for issuers, said Tae Jong Ok, an analyst at Moody’s who has raised concerns over risk-taking at South Korean securities companies.
“If there is a significant cancellation of these products the securities companies may be faced with very short-term liquidity issues . . . they would need to sell the underlying assets, unwind their derivatives, which could entail some significant losses during a time of stress when others might be trying to do the same thing.”
Mirae Asset Daewoo Securities, a Seoul brokerage, said the group had received “a lot of inquiries from investors about what they should do with their oil-linked investments” after Monday’s price collapse. “We have been advising them to hold the products until they mature because oil prices could rebound.”
The chief executive of another large South Korean brokerage also pointed to the possibility of an oil price recovery, suggesting that investors should understand the risks involved.
“There is not much we can do to stem investor losses because oil prices are beyond our control,” he said. “These are not bank savings, every investment product carries some risks. Regulators should not overreact to this.”
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
