It seems to be a good time to quote an old British war time motivational poster, by saying “keep calm and carry on”. The developments that unfolded from the referendum held in the U.K. on Thursday left many within the U.K. and globally waking up with a hang over which they found hard to shake off. Panic spread in the stock markets and forex trading, as most investors rushed to take refuge wherever they could so as to avoid the immense increase in uncertainty and potential volatility. In part this was over exaggerated, as when one takes a sober look at how a Brexit would occur you could see that the process is to be stretched over a long period of time and it will likely be done in an orderly fashion. Nevertheless the potential fallout is significant as was described in our previous iteration of our market insight.
We have already witnessed a considerable rally in the U.S. Dollar, Japanese Yen and the price of gold. With the first two not taken as positive outcomes by the respective economies i.e. The U.S. and Japan, which are likely to be hurt by this in terms of their trade balance and in turn their competitiveness in the global markets. At the same time there is less bullishness with regards to the major developing economies, with the Chinese economy being hit both in its stock market and its currency. The lower price of the Renminbi could possibly boost the competitiveness of their exports, but as a more immediate effect it will likely cause difficulties in terms of the importing of raw materials like iron ore, coal, grains and crude oil as their relative price increases considerably. Furthermore, given the fact that the focus of late within mainland China has been to source the next round of its economic growth from its own consumers, their purchasing power will be diminished by the inflationary pressure brought about by the hike in the prices of these main commodities. This however is a short term effect and should dissipate fairly quickly. The main thing that will remain is the likelihood of a further slowdown in the global economy and trade during the next two years, as the initial effects take on the first punch, later followed through by a lack in investment and consumer spending due to the once again increasing uncertainty, after which we will also see the third stage of the fallout be the actual dent caused in the two main economies involved (the U.K. and Europe) by the reversal of the open trade agreement currently held. The effect of this last stage should spill over to the rest of the globe as the global multiplier of trade and economic growth takes a hit. It is obvious to point out here that all this depends on what happens next and being that the scenarios are multiple and a lot depends on the next decisions made by politicians, it is hard to see at this point which way things will swing.
No matter which way the two parties choose to go politically and economically through their negotiations, the damage has been done and given the state of things, it looks as though we are in for a bumpy ride over the next couple of months while the ripples of the initial shock felt in the financial markets on the very day after the referendum, will soon come and hit the shores of shipping and global trade itself. The intense uncertainty and volatility will only amplify that which has already been seen in shipping markets up until today and will likely bring about a big series of further problems in terms of the balance between supply and demand.