The impact of a Trump impeachment would be just too unpredictable for confused markets to cheer it on
- Hope that the impeachment inquiry may spur Trump to conclude a trade truce with China remains just that – mere hope. Too many variables are at play, including Beijing’s reaction to a weakened Trump presidency. Truth be told, markets have not done too badly under Trump
If the betting markets are to be believed, the chances of US President Donald Trump being impeached by the end of his first term currently stand at just under 70 per cent.
According to PredictIt, a political betting website, the odds have risen sharply since September 24, when the opposition Democratic Party, which controls the House of Representatives, launched an impeachment inquiry into charges that Trump improperly solicited the aid of Ukraine’s president to help dig up dirt on former vice-president Joe Biden. Biden is one of the leading Democratic contenders to take on Trump in next year’s presidential election.
These odds seem far too high, given that it is unclear whether the House will be able to find incontrovertible evidence against Trump (and, more importantly, whether a sufficient number of Trump’s fellow Republicans, who control the Senate, would vote to convict a president from their own party). Yet, the dramatic increase in US political risk injects yet more uncertainty into an already perilous global economic and policymaking environment.
US domestic politics, moreover, has suddenly risen to the top of the list of concerns for financial markets.
The difficulty in perceiving and forecasting US political trends correctly is compounded by the fact that American politics has become even more polarised since Trump became president, and is currently in a state of flux.
If further momentum builds behind the Democrats’ efforts, the health of the US economy will become even more critical to the president’s chances of re-election.
The combination of a more politically vulnerable president and a sharper economic slowdown would increase pressure on Trump to agree on a trade truce fairly quickly. This may help explain why the benchmark S&P 500 equity index is still less than 5 per cent shy of its all-time high.
Indeed, some investment strategists are already suggesting that the investigation may be just what is needed to de-escalate the trade conflict.
Trump knows ending the trade war will help him win in 2020
Not so fast. As JPMorgan rightly observed in a report published on September 25, there are several plausible scenarios for “how the president [would] behave internationally when encircled domestically, and how other countries [would] interact with an embattled president”.
Not only is there a risk – and a significant one at that – that the impeachment proceedings backfire on the Democrats by energising Trump’s voters and increasing his chances of re-election, it is also possible that Beijing will scent blood.
Rather than making the concessions necessary to defuse trade tensions, China could try to sabotage Trump’s re-election bid by stringing out the negotiations, thereby depriving Trump of a “big win” on trade and putting America’s economy under more strain.
Indeed, the only thing that is clear from a market standpoint is that trading the impeachment process is a mug’s game. There are too many imponderables – Trump’s actions and reactions being the most obvious ones – to predict what will happen as the presidential campaign gets under way.
Still, this will not stop American politics becoming a more important determinant of sentiment, particularly given how sensitive markets are to Trump’s latest tweets on the likelihood of a deal with Beijing.
Investors should be careful what they wish for. It is one thing if the impeachment inquiry makes Trump less inclined to escalate the trade war; it is quite another if the inquiry affects his re-election prospects sufficiently to help the Democrats take back the White House.
Although most investors would love to see the back of Trump, a Democratic president poses its own set of problems, especially if the party were to reclaim control of the Senate. While a Democratic president would be more likely to ease trade tensions, mainly to focus on domestic issues, Trump’s tax cuts would be rolled back and there would be much more regulation, putting stock markets under severe strain.
If truth be told, markets have not done too badly under Trump. This is one more reason why investors will struggle to make sense of the impeachment drama.
Nicholas Spiro is a partner at Lauressa Advisory
