Sep 13, 2016

Should We Be Concerned About the Collapse of Hanjin and Swiber?


August has been a quiet month with no major market moving events. This relative clam has been beneficial for the Asian stock market, which has been struggling to gain any grounds in the past year thanks to the turbulence from China and commodity prices. The market is also complacent, represented by a low VIX index as the market believes that there is a low possibility of the US Federal Bank rising interest rate for the month of September. Towards the end of the month, investors began to feel more concern about the possibility of a rate hike in September leading to a rally in USD.

On 31st Aug, Korean largest shipping company, Hanjin Shipping files for bankruptcy protection and their ships were denied entry in major ports all around the world. As one of the largest container shipping company around the world, the bankruptcy of the company has lead to supply chain woes as stores around the world are unable to stock up their components and products leading to the Christmas season. Perhaps, the more severe implication is that this is seen as a Lehman moment for the global shipping industry and a sign of the overcapacity built up in the shipping industry during the boom times. Closer to home, the bankruptcy of a major oil and gas company Swiber has exposed the vulnerability of commodity related companies in Singapore and in other parts of the world. The global trade slow-down is now threatening shipping and commodity firms world wide and the supporting institutions such as banks.

Is this the start of a chain reaction like what we see during the Lehman Brother crisis whereby many other related companies are nearly brought to their knees as a result of the implosion of derivative products? Luckily, unlike the banking sector, the shipping and commodity companies are not linked by complex and leveraged derivatives and the collapse of a competitor is actually beneficial to other related companies. However, we cannot discount the possibility of the fear factor which may lead to a stampede to the door, just like what happened during the Dot-com bubble when the collapse of the AOL deal and bankruptcy of Worldcom sparked off the Dot-com technology crash.

With the market at a state of complacency, it is not a good time to be aggressive. In the past few days, hawkish comments from voting members of the US Federal Bank has lead to a sharp 2% interday fall as investors are suddenly concern about an earlier than expected rate hike. In previous market cycle, speculation on whether the US Federal Reserve will or will not raise interest rates has minimal impact on the financial market. However, with the global recovery being built on a weak foundation of cheap money, the impact of any interest rate change will have a much more significant impact for this cycle. 

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