How Will the US Impeachment Enquiry Affect the Global Markets?

Presidential impeachment enquiries are nothing new for the United States of America. However, political instability in the world’s biggest economy does impact the global financial markets in a rather unpredictable way. For instance, the Clinton impeachment proceedings announcement in October 1998 led to the markets declining almost 1.2%, only to rebound 18% in the next 30 days, and 41.6% in the following six months.

On September 24, 2019, the Democrats in the US House of Representatives launched a formal impeachment enquiry against US President Donald Trump, for matters related to abuse of power. The impeachment proceedings will take months to conclude, and in the meantime, the ensuing uncertainties could shake up the financial markets.

A variety of issues, such as the US-China trade negotiations, disputes with the EU and developments in US-Iran politics, are all at stake here. Will the stock markets crash if the President is impeached, as famously predicted by Donald Trump himself a year ago? Let’s take a look.

Impact on the US Dollar

The markets initially went into an overnight sell-off mode for the US Dollar, following the impeachment enquiry announcement, only to recover later on. However, the greenback didn’t soar to great levels after that, given the potential for negative outcomes. Impeachment proceedings added to the already growing concerns regarding the US-Sino trade tensions, which made investors flock towards safe haven currencies like the Japanese Yen and the Swiss Franc.

The USD traded at a two-week low of 106.96 against the JPY, following the announcement, before climbing only 0.2% against it later on. The Swiss Franc (CHF) also soared higher to trade at 0.9866 per USD, after trading at a three-week high of 0.9845 against the US Dollar.

The US Dollar has done fairly well under Trump’s presidency, which is why any news suggesting an early end to his tenure could impact its value. Historically, political uncertainties lead to volatility in the currency markets. For instance, the DXY Dollar Index fell rapidly from August to October 1998, when President Clinton was facing impeachment proceedings.

At this point, it remains highly unlikely that the President will actually be removed from office. Even if the US House of Representatives decides to vote against him, the Republican Senate might not. In that case, the main area of focus for traders would continue to be regarding US-China trade tensions.

Some experts believe that President Trump’s early departure could be beneficial for the US Dollar, as it might lead to a de-escalation of the trade war and a breath of relief for the US Federal Reserve, which is under immense pressure from the current president to reduce interest rates.

A rise in the value of the US Dollar could lead global funds flocking to safe-haven assets, which in turn could trigger a sell-off in the equity markets. It could also lead to a decline in commodity prices, like that of oil.

Interestingly, the value of gold, which usually rises during times of uncertainty, has fallen since the start of the impeachment proceedings. Investors have preferred the US Dollar over gold, as a hedge. Gold is largely reserved for currency devaluations and lowering of interest rates by central banks.

Increased Stock Market Volatility

President Trump has been associated with stock market rallies, ever since he came to power. His impeachment proceedings could, therefore, have a huge impact on the global stock markets. Any sharp move in the US markets will impact others as well.

The impeachment announcement caused a sudden sell-off in the stock market, which lasted for a short time. On September 26, 2019, the Dow Jones Industrial Average declined 0.3%, only to gain 0.14% when the markets opened. The S&P 500, however, fell 0.24%, continuing to decline another 0.17% during the following week.

Economists and market analysts believe that the markets are not gravely affected by such impeachment proceedings, except for volatility issues. So, while it is difficult to ascertain the effects of the impeachment on the stock markets in the longer run, short-term volatility is hugely expected.

As opposed to the actual impeachment, investors tend to be more concerned about the secondary and tertiary effects of the impeachment proceedings. Increased possibility of the impeachment of the US President would make it difficult to resolve the trade war, which is hurting economies worldwide.

So, in anticipation of this announcement, Wall Street closed weaker a day earlier. Even Australia’s ASX declined 0.5%, as did Japan’s Nikkei 225 and the Korean KOSPI. Hong Kong’s Hang Sheng declined 0.8%, while the Shanghai Composite fell 0.7% on September 24, 2019.

Adding to the Woes of the Global Economy

Impeachment proceedings are likely to only hurt business sentiments, against a backdrop of a weakening global economy. The proceedings will take months, and it is the uncertainty that will be disruptive for companies. There is already a lot of uncertainty in the global markets, due to the rising trade tensions, the fast approaching Brexit deadline and weak Eurozone economic data. Amidst these long-standing proceedings, a few things could heighten the chaos:

• A slower pace of negotiations between the US and China, as the President’s authority will be questioned a great deal. Prospects of a comprehensive deal have been fading for some time now. This trade war is starting to hurt US economic prospects too.
• The US-Mexico-Canada Free Trade Agreement (USMCA) has been hanging un-resolved for a long time. Many are hoping that the impeachment proceedings will likely make Nancy Pelosi schedule a vote on this sooner, rather than later.
• The Trump administration has imposed steep tariffs of 25% on a range of EU agricultural goods and 10% on EU manufactured aircraft, in response to the EU subsidies provided to Airbus. The EU has promised retaliation against the US, in a similar case pertaining to Boeing. Rising uncertainty over one of the most important economic trade paths could heighten the negative outlook for importers, exporters, workers and manufacturers on both sides of the Atlantic.

While the impeachment could cause market jitters, it is the President’s volatile nature that is also a major concern. Keeping a close eye on major global developments seems like a good idea for traders at this time.

Reference Links

• https://money.usnews.com/investing/stock-market-news/articles/2019-09-26/how-will-the-impeachment-inquiry-affect-markets
• https://www.cnbc.com/2019/09/25/dollar-hobbled-by-trump-impeachment-inquiry-weak-us-data.html
• https://www.poundsterlinglive.com/usd/12104-u-s-dollar-loses-seen-as-the-loser-from-push-to-impeach-trump
• https://www.forbes.com/sites/sergeiklebnikov/2019/09/26/heres-how-impeachment-talks-will-affect-the-stock-market/#5ea3bcbc246a
• https://www.businessinsider.in/stock-market/the-impeachment-inquiry-into-trump-has-rattled-global-markets-and-poses-a-serious-setback-to-resolving-the-trade-war/articleshow/71289995.cms
• https://www.ubs.com/global/en/wealth-management/marketnews/financial-education/article.1455569.html
• https://www.gazettenet.com/US-Europe-dispute-threatens-main-artery-of-world-trade-29050186