What the Trump impeachment effort means to Indian markets?

What exactly does an impeachment motion involve, how will it impact global markets and what does it mean for India?

Sep 30, 2019 03:09 IST India Infoline News Service

Over the last few weeks, the trade war between the US and China has been relegated to the sidelines. The big news doing the rounds is the impeachment motion against Donald Trump. Trump is not the first US President to face an impeachment motion with Bill Clinton facing an impeachment motion a little over 20 years ago. But, the only US president who was forced to resign ahead of an impeachment hearing was Richard Nixon; and that was 45-years ago. What exactly does an impeachment motion involve, how will it impact global markets and what does it mean for India?
 
The impeachment process: what it entails
The big push for the impeachment process came after the release of a White House phone transcript and a whistleblower complaint. Nancy Pelosi the Democrat Speaker is leading the charge. Broadly, the impeachment will entail some important steps.
  1. Impeachment inquiry will focus on Ukraine affair. As per Adam Schiff of the House Intelligence Committee, next steps will include subpoenas and witness interviews.
  2. The House Judiciary Committee will need to approve articles of impeachment before the full House takes a vote.
  3. Thirdly, the Senate takes over. Chief Justice will preside over a televised trial in the Senate. Out of 100 members of the upper chamber 67 "guilty" votes will be required.
  4. Even if the president is technically impeached, it is not essential that he will have to demit office.

What will the impeachment mean for the global markets?
If you observe the market volatility in the last few days, the impeachment trial is surely having an impact. That is evident in the market volatility. From a very short term perspective, this could have 3 implications. Firstly, the stock markets as well as the bond markets in the US and across the world could become extremely volatile. Look at the chart below that captures the volatility in the Dow on September 23, 2019.

Chart Source: CNBC

It is obvious that anything that puts Trump’s position at risk is not very well received by the markets. Secondly, there is the bigger allocation risk of investors preferring to go towards low risk assets like safe bonds, sturdy equities or even gold. This rapid re-allocation also adds to the volatility in the markets. Thirdly, till the time there is clarity on the impeachment process, no decision on the trade talks is likely to happen. That means, the overhang of the trade war on global growth continues and that is not great news for markets.

That is the impact in the very short term. But, as we have seen in the past, the impact of an impeachment motion lasts for a much longer period. Markets typically hate this period of uncertainty and that is reflected in the pricing of risk. To get a comparable scenario, let us look at how the markets reacted the last and only time the US president had to actually resign ahead of impeachment, i.e. Richard Nixon in 1974.

Chart Source: Bloomberg

One can argue that the last instance of Nixon was 45 years back and markets have changed substantially since then. However, the underlying risk remains even today, at least going by the way global markets have reacted to impeachment stimuli.
 
What the impeachment means for the US and for India?

On the market and macro front, the impact is already visible. But, there are 3 key points to remember about the outcome.
  1. There is also a business side to it, as India has invested a lot of diplomatic and economic capital betting on Trump taking a pro-India approach. Also relations have improved with the US and this may put things on the back burner; more so after the Houston meet.
  2. Oil prices could be the first commodity casualty as the ongoing impeachment motion will mean that trade talks could be on the back burner. A likely growth slowdown is expected to keep oil prices depressed.
  3. The impeachment can also have an impact on the rupee. The dollar index (DXY) recently touched a 2-month high as the impeachment motion is likely to lead to a risk-off shift favouring US assets by portfolio managers. That could mean stronger dollar and weaker rupee.
For now, the big impeachment impact will be on volatility in equity and bond markets. Of course, gold may end up being the gainer!

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