Ukrainegate: is this relevant for the markets?

Trump was elected three years ago, and for almost three years, there has been intermittent talk of launching impeachment proceedings against him. We remember that, originally, the possible motive was interference from Russia in the 2016 campaign. This led to the Mueller inquiry. We now have events that occurred during Trump’s term rather than prior to the election, which on paper is more serious.

Trump is the fourth US President in history to be faced with the formal launch of impeachment proceedings. As the Democrats have held the majority in the House of Representatives since the Mid-Term election of November 2018, the launch is credible.  

As things stand, we do not believe the impeachment proceedings against Trump will be completed, or even that he will resign. First, because a 2/3 majority of the Senate appears impossible to muster, as the Republicans have 51 seats and not one has defaulted so far. The case against Trump would have to be extremely sound and thorough to envisage a process “à la Nixon”.

Also, the impeachment process is not particularly popular with public opinion.

On average since the beginning of 2017, only 38.5% of public opinion has approved the impeachment idea vs 55.7% against, this despite opinion predominantly disapproving the attitude of the President, particularly with regards to Russian interference during the 2016 campaign. 

The main risk for the Democrats is clearly to reinforce Trump, even though he is not popular on a nationwide scale, with an approval rating of just above 40% in recent months. 

Remember that, after the failure of Monicagate de 1998, Bill Clinton had, against all odds, won the Mid-Term election of 1998.

Finally, there is the question of whether Trump leaving before 3 November 2020 would be such a bad thing for risky assets given that Vice President Mike Pence would most likely stand in his place, which, in terms of predictability (especially with regards to trade negotiations), technical credibility and quality of relationship with Congress, would be quite favourable.

That being said, there would be several problems for the markets. The first is that, thus far, predictive markets have hardly budged and price in Trump’s impeachment with a very low probability. Any bad news is thus likely to bring volatility.

The second problem in this case is that Joe Biden’s position does not look squeaky clean either. This could be favourable for Democrat Elizabeth Warren, who is far further to the left and would imply difficulties for equities.

The third problem for the markets and the economy is that impeachment is a source of uncertainty. It is a lengthy process (several months), and we are now some 400 days before the election of 3 November 2020.

All in all, the impeachment process will reinforce the already high importance of the US election, for the economy and the markets, over the next 13 months; with the presidential campaign, impeachment proceedings, and additional geopolitical effects (trade war between the US and China, relationship with Iran, etc.). We should also point out that the weight of the left wing of the Democratic party (Bernie Sanders and even more so Elizabeth Warren) has been rising in predictive markets. Should Elizabeth Warren be elected, there is a risk of having a highly polarised election, coupled with a global and historical slowdown in a year’s time given her proposed policies in terms of taxation (corporate tax, income tax, CGT and inheritance tax), and social policies (higher contributions, twofold increase in the minimum wage) and competition law (reregulation and break-up of GAFA).

This would obviously have a fallout on the markets, which we do not believe is priced in for the time being.