In recent times, the value of the ailing pound has represented the easiest way to gauge the market sentiment towards Brexit. After all, the value of GBP tends to increase at the prospect of a close and amicable relationship between the UK and the EU, whilst anything that signals a no-deal departure sends the pound plunging.
Whilst these fluctuations in the value of the pound may impact directly on the forex market, they also impact on other sectors in the financial space. Take the commodity market, for example, which drives both corporeal and derivative trades that are influenced heavily by the underlying value of the pound.
In this post, we’ll appraise the value of the commodity market in the UK, whilst asking how it’s likely to be impacted in the event of a no-deal Brexit.
The Numbers Behind the UK Commodity Market
There are two sides to the commodity market in the UK, the first of which sees physical goods and materials exported overseas.
The UK is currently considered to be the ninth-largest economy in the world, having shipped $460.1 billion worth of goods prior to the referendum results in 2015. Primary commodities like gems, precious metals and oils accounted for around 20% of these exports, whilst $36.4 billion worth of vehicles were also shipped overseas during this 12-month period.
Not only this, but the vast majority of these exports ($133.36 billion-worth) went to the EU, and there’s no doubt that a no-deal Brexit will have a dramatic impact on the UK economy.
Beyond this, investors can also trade these commodities online, either by speculating on market price shifts or buying and selling the right to trade derivatives at a future date.
This market is deceptively popular amongst investors, primarily because they can leverage commodity price fluctuations to achieve a profit even in a depreciating market.
So, how will a No-Deal Brexit Impact on Commodity Trading in the UK?
Given the value of the UK’s exports to the EU and the amount traded on commodities on a daily basis, there’s no doubt that Brexit will have a seismic impact on the economy.
However, there’s a difference between a managed exit from the EU and a no-deal Brexit, as whilst the former will impose tariffs and more stringent customs regulations, the demand for exports may actually increase as the value of the pound falls incrementally.
In the case of a no-deal Brexit, however, some of the UK’s exports would automatically incur significant tariffs under the terms of the World Trading Organisation (WTO). Take lamb, for example, which would attract tariffs as high as 40% under WTO rules and create a scenario where exporting this to the EU (or elsewhere) becomes completely unviable.
You could argue that a no-deal Brexit would not be as damaging for those who trade commodities as derivatives, as these individuals can leverage the uncertainty and volatility to achieve a viable profit.
However, commodities are also interlinked with certain corporations and forex trading, so stock traders may see the value of their interests decline as economic sentiment in the UK and the EU plunges.