Analysis: Impeachment threat muddies economic picture, financial markets

Just when it seemed U.S. stocks would sleepwalk back to a record, bulls got derailed by a new worry: rising odds that Donald Trump will be impeached.

No one’s suggesting that the threat of removing the president from office alone was enough to send equities on Tuesday to the biggest loss in a month and drive a rush into haven assets. Trade tensions remain elevated and economic data continue to show signs of trouble, including among American consumers. But odds for impeachment at PredictIt.com surged to 65%, spooking investors attuned to the effects of political turmoil on financial markets.

“It’s just another arrow into the mix right now,” said Stephen Carl, a trader at Williams Capital Group. “The market hasn’t been moving forward with really any conviction,” he said, but “now we’re dealing with a bunch of geopolitical situations and uncertainties.”

Investors now face the complicated task of assessing how the House’s move to impeach Trump is likely to impact the economy and financial markets. It changes the calculus in handicapping the trade war, whether prescription drug pricing gets addressed and any other regulatory issues. How, precisely, will be hotly debated on Wall Street.

For now, anyone unconvinced that impeachment added to Tuesday’s misery need only check the S&P 500’s intraday chart. The biggest decline came when House Speaker Nancy Pelosi said she’d speak after meeting with committee heads clamoring for action against Trump. Stocks bounced off their lows when Trump said he’d release a transcript of the call at the center of the Ukraine controversy, only to turn lower when Pelosi said she’d open a formal impeachment inquiry.

Overnight, futures edged lower before turning little changed ahead of the open.

The headlines “are contributing to modest weakness in risk markets by mining into a new shaft of uncertainty,” said Shahab Jalinoos, global head of foreign-exchange trading strategy at Credit Suisse. “Markets are pricing in, as of now, a marginal amount of extra risk premium.”

Investors flocked to havens such as bonds and gold. Yields on 10-year Treasuries sank nine basis points, the most since mid-August when the bond market surged on recession fears. Gold extended its longest rally in three months. The Cboe Volatility Index jumped above 17 for the first time in nearly 20 days. The dollar tumbled the most in three weeks.

“Impeachment proceedings would likely add to uncertainty within the U.S. economy, which is typically a negative development for the currency,” said Brendan McKenna, a foreign-exchange strategist at Wells Fargo Securities in New York. “It could weigh on the dollar going forward.”

For stocks, the sell-off ended three weeks of torpor that saw the S&P 500 sleepwalk back toward a record. After enduring two routs of at least 2% and six 1% rallies during the August tumult, wild swings had become scarce: Before Tuesday the S&P 500 went 12 days without a move of 0.75%. Last week, realized 10-day volatility hit its lowest level in a year.

There’s precedent for impeachment to rattle stocks. When the House voted to introduce proceedings against Bill Clinton on Oct. 8, 1998, the S&P 500 fell to its lowest level in nine months. The knee-jerk reaction proved a good buying opportunity: from session lows, the S&P 500 would rise 33% by year-end. The reasons for the rally were many, though: it came on the heels of the implosion of Long Term Capital Management, lingering stress in emerging economies from the Asian currency crisis, and a Federal Reserve that cut rates 75 basis points in less than two months.

To be sure, the goings on in Washington Tuesday weren’t the only threat to risk assets. Cracks in consumer confidence, the bulwark of the economy, became apparent after a U.S. gauge posted its biggest drop since the start of the year as expectations for the economy and jobs market deteriorated. The drop poses a risk to household spending that is underpinning growth.

“It’s the consumer that’s holding the economy on his or her back,” Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said by phone. But, “everything seems to be slow around the edges.”

In a speech at the United Nations, Trump accused China of currency manipulation, theft of intellectual property, and dumping, sending anxiety swirling that the two nations are still far from reaching a trade deal. Semiconductors, a segment particularly sensitive to trade tensions, led losses.

“The president is taking a hard line against China,” said Tom Essaye, a former Merrill Lynch trader who founded “The Sevens Report” newsletter. It “is a reminder to the market that while there can be positive movement on the edges, I think we are a long way from a trade deal.”

But a closer look shows there’s more to the story than trade. China-centric U.S. stocks are underperforming the S&P 500 by less than 40 basis points. That group has tended to lag by at least twice as much at times when trade fears are at the epicenter of a market retreat.

“This equity decline is less about President Trump’s hawkish speech, and more about rising impeachment risks,” said Naufal Sanaullah, chief macro strategist at EIA All Weather Alpha Partners. “We expect an impeachment headline to be bearish to the market initially, but ultimately will diminish President Trump’s focus and hawkishness on trade policy, and for that narrative to start to bleed into U.S. vs China relative asset performance, as well as lower dollar.”