22nd May 2017 | Dubai
By Didier Borowski, Research, Strategy and Analysis, Amundi Asset Management
Since March the hypothesis of an impeachment procedure against president Donald Trump has gained ground. The declarations from Diane Feinstein (well-known Democratic Senator) about Donald Trump on 21 March gave considerable credibility to this hypothesis: “We know he is breaking the law every day”(…) We have a lot of people looking into this. I think he’s going to get himself out (…) We’re working on a bill that would do that now … We’re working on a couple of bills that would deal with conflicts of interest.”
The recent events have clearly reinforced the willingness of Democrats to act.
Would GOP congressmen vote impeachment?
Not sure. The Congress was controlled by Democrats during the Watergate and by Republicans in 1998, when Bill Clinton was charged of perjury by the House of Representatives. Here is the difference: Republicans have today a comfortable majority in the House (55%, 20 deputies). And so far opinion polls still benefit to Trump. His approval rating, while more than 20 points below the historical average for first-term presidents, has remained stable so far (around 38%).
Moreover, keep in mind that impeachment does not mean expulsion from the office. Under the constitution, impeachment occurs in the House of Representatives if a simple majority approves the indictments previously approved in committee. Then impeachment goes to the Senate, where a two-thirds majority vote is necessary to remove the President from the office. Two presidents were impeached in US history. Johnson (1868) and Clinton (1998) were impeached in the House but were acquitted in the Senate and remained in office. The procedure took approximatively 3 months for Bill Clinton (note that Nixon was not formally impeached, as he resigned before the vote from the House). At this stage, Republicans would probably oppose an impeachment procedure in the House. Looking ahead, however, they could change their mind if Trump’s approval ratings fall.
What impact on financial markets?
Following the new revelations yesterday, US equities, Treasury yields and the USD all went down simultaneously, with contagion to other financial centers. However, while the political turmoil will clearly affect the policy-mix in the US, we believe that it is not a real game changer for markets.
- The probability of a big fiscal package passing Congress during the summer had already fallen(for other reasons) and there was nothing to expect before the autumn on the fiscal side. The ongoing investigation may slow (or even freeze) the negotiations between Congressmen on fiscal issues. Keep in mind that Trump has also promised some infrastructure spending. To do so, he must take on board some democrats (as his majority in Senate is too tight, 52 seats out of 100). Thus this political strategy (capturing some democrat votes with infrastructure spending) is now cast into doubt.
- In the absence of a fiscal support, the Fed would stay very cautious: the current cycle – that has started almost 8 years ago in the US – is fragile and core inflation has receded recently. We expect two more rate hikes at mostthis year (they are already priced in). The Fed would do less in case of a political crisis (impeachment procedure)
- Bond yields may drop somewhat in the short run(the Treasury market remains the ultimate safe haven)
- But as there is neither a recession nor a strong acceleration to come, we don’t expect a big move on Treasury yields. The biggest threat for the equity market (given stretched valuations), would have been a sudden spike in long-term bond yields and a significant upward shift in equilibrium rates. This threat has disappeared from the radar screens. Given the political turmoil, the low probability of a fiscal package and other structural aspects (in relation with secular stagnation, savings glut), we believe that Treasury yields are capped and may even decline further.
- That is negative for the US dollar in the short run (less from the Fed, potentially lower bond yields and less support than expected from fiscal policy)
- But that is not a game changer for markets, worldwide. In the “worst-case scenario” (impeachment procedure), Trump would be replaced by his vice president Mike Pence, and that could ultimately reassure investors. Monetary conditions – that are still accommodative – would become even more accommodative and sustain growth and equities. Subsequently, we believe that the jump in volatility that would result from an impeachment procedure would be short-lived.
- Against this backdrop, we expect eurozone equities to continue to benefit (1) from the ongoing cyclical recovery that has continuously strengthened since the beginning of the year and (2) from valuations that remain more attractive than in the US.