If the never-ending trade wars and signs of global economic slowdown didn’t already cause investors enough sleepless nights, markets participants will now have to assess the likelihood of Trump being impeached and what it actually means for their portfolios. As the story grabbed the spotlight for most of last week after it broke out on Monday, the markets had mixed reactions, but eventually, the S&P closed 1% lower.
The betting markets have been long hinting that impeachment was on the cards, placing a 2/1 probability in June, but have since shifted to even odds when Trump’s calls with the Ukrainian president were made public. After gaining the support of roughly 90% of the Democratic caucus, House Speaker Nancy Pelosi decided to move forward with an official impeachment inquiry. The accusations of abuse of power brought on Trump are reminiscent of the Nixon era. Whilst I won’t get into much detail of the underlying potential wrongdoings, I instead will focus more on the impact it might have on markets and the 2020 presidential race.
A United States president being impeached is not necessarily something new, as Presidents Nixon, Clinton and Johnson were all impeached in the past (Nixon resigned before being convicted, while the latter were not convicted). The difference here is that none of them were in the re-election cycle. If the Democrats build a solid enough case, then the impeachment will be put to a vote by the Democratic-controlled House. A majority vote will send them to the Republican-controlled Senate, where two-thirds of votes will be needed for conviction. Based on this, a conviction looks highly unlikely, although the way Democrats handle the inquiry, will shape the course of the 2020 election. As previously mentioned, the chances for impeachment moved higher, although Trump’s odds for re-election remained unchanged. Therefore, a weak case, lacking solid evidence and generating confusion could prove to be the boost Trump needs to secure a 2020 victory.
In the scenario where the House obtains a majority for impeachment, from Trump’s perspective, unless his chances for re-election are harmed, we expect to see more of the same transpiring in the upcoming months but with a pinch of volatility in both FX and equity markets. If things escalate, however, he might shift his focus away from the ongoing trade wars, pushing his agenda into the future, and would try to appeal more to his Republican base. It is also likely that China would try to take advantage of the President’s personal distractions, and push for a deal to happen sooner rather than later. Increased volatility and prolonged uncertainty will most likely help sustain the dollar bull rally, but a rush to get a trade deal over the line will bring calm to the markets and steer investors away from safe havens.
Another scenario that is worth looking at is Trump falling behind in the polls, with markets adjusting for a potential Democratic presidency. In recent weeks we have seen Elizabeth Warren become the heavy favourite to become the Democratic nominee after Joe Biden had led the race for most of 2019. However, investors are not feeling very optimistic about a Warren presidency. In a survey of U.S. institutional equity investors published Tuesday by RBC Capital Markets, 89% of respondents said a win by a Democrat other than Biden would be “bearish or very bearish” for U.S. equities. Warren has often shown ire towards big banks and promised to break up the big internet companies, as well as planning on imposing a wealth tax on the super-rich. This could prove to be the tipping point for the long-foreseen US equities recession, and a mass migration towards safe havens. In this scenario, the greenback would likely receive a significant boost in the short-term, while the long-term effects would be dependent on the state of the US economy.
The last scenario, and probably the least likely, will be for Trump to become the first convicted President and removed from office. Although, if the investigation sheds light on some irrefutable evidence we could see enough Republicans choosing to be on the right side of history and vote for the conviction. If this unprecedented scenario does happen, volatility might spike considerably in the build-up, with things moving back to normal once the Mike Pence administration settles in. Under an unelected Mike Pence term, we expect a more traditionalist approach to the Presidency, most likely bringing some calm to the markets, after a tumultuous period under Trump where the greenback would probably move marginally lower in the short-term. However, a Trump conviction could severely impede a positive Republican outcome in 2020, which would lead us back to the second scenario.
As things stand right now, the base case sees Trump get on with business as usual, but investors should brace themselves for a bumpy ride if the impeachment inquiry gains ground.
Author: Vlad Stefan