LCG: What Trump impeachment proceedings mean for markets

LCG: What Trump impeachment proceedings mean for markets

27 september 2019

Aandelen Valuta
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US Equities

The knee-jerk reaction to sell stocks on impeachment news makes sense but the rebound off the lows is more telling. If the Mueller inquiry offers us any guideline about political instability under President Trump, investors should expect short bouts of market volatility but longer-term ambivalence. In fact, the ambivalence during the Mueller probe proved correct. The Senate seems unlikely to wave through impeachment so characterising the event as another "witch hunt" that will lead to nothing is reasonable. The downside risk from the impeachment proceedings is more a reflection of the different environment to when the Mueller probe was in full tilt. The difference this time around is that there are no US tax cuts and there is a trade war.

Looking into individual sectors and how impeachment proceedings may affect government policy, a bipartisan bill on infrastructure looks less likely, which is a negative for construction and material companies. Bipartisan action to curtail excessive drug pricing would also be less likely, so healthcare and biotech’s could be beneficiaries. Looking at trade effects, if we are right to assume impeachment proceedings reduce the chance of a US-China trade deal, then technology stocks are more at risk.

European Equities

The impact on Europe from impeachment proceedings in the US comes indirectly via any possible impact it has on Trump’s attitude toward Trade. Europe is on Trump’s radar for tariffs. We tend to think that If Trump feels backed into a corner by impeachment, he comes out throwing fists – and that increases the chances of auto tariffs on Europe. The counter argument of this is that with bigger domestic problems to fight off, the chances of Trump expanding the trade war to Europe are diminished. In our view, almost counter-intuitively, the impeachment would increase the under-performance of European versus US equities because of the adverse impact we think it could have on the trade war.

The Dollar

The dollar has been a beneficiary of the announcement of impeachment proceedings. The initial flow into the dollar has been a flight to safety rather than an acknowledgement of higher US political uncertainty. We see impeachment as putting more upward pressure on the dollar beyond haven effects, because we think it inflames the trade war. Additionally, if impeachment were to happen, there would likely be a more conventional Presidential attitude for a strong-dollar policy.

Gold

Interestingly, gold has fallen since the impeachment proceedings were announced with investors preferring the dollar as protection from political uncertainty. This firms up our view that the rally in gold prices this year has not primarily been a function of haven flows but as protection from currency devaluation. As such we think overall impeachment is neutral for gold.

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