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A Trump impeachment and the Greek recession

19 May 2017

Is the possibility of a Trump impeachment a reason to sell the equity market?

The election of Donald Trump led equity markets higher as investors viewed his proposals on tax and deregulation as a potential boost to the economy and shareholders. As Trump came into office at the start of this year, some of the sectors which were boosted by these expectations took a pause and reversed as policy proved difficult to implement. The presidency was already mired in controversy with measures such as the travel ban and some high profile reshuffles, but this week things took a turn for the worse.

After the controversial sacking of FBI director James Comey last week, there have been even more concerning revelations. Firstly, the press reported that Trump gave classified information to Russia which is increasingly contentious on the backdrop of the alleged ties between the Trump campaign and Russia. What rattled the markets further on Wednesday was the “Comey memo” which apparently entails a request from President Trump to end the investigation into his then national security advisor, Mike Flynn. If this proves true, Trump could be guilty of obstruction of justice which could see him impeached.

If US politics are steered away from the key policy initiatives in favour of indicting their president then the fiscal boost that markets have expected may be significantly delayed. As a result, the unwinding of the so called Trump trade may have further to go. However, if Trump were to be impeached, in normal circumstances Mike Pence would take over. As an experienced politician with a similar economic agenda he could be seen as a Trump without the distractions.

So the possibility of impeachment is not necessarily a reason to sell the markets down but if they do go lower, investors that have missed the rally this year will have an opportunity to get back into the market. A tweet-less Trump could be welcomed by some.

With Greece back in recession does another Euro crisis loom?

Greece slid back into recession which is, by definition, two quarters of negative economic growth. However, the quarter on quarter decline of -0.5% for the first three months of the year indicates the extent of its contraction is modest. At the start of May, Greece agreed terms to a further bailout deal with the EU and IMF to allow it to meet its hefty debt repayments due in July. This should keep the country going for the moment and alleviates some of the cause for concern.

Our concerns are muted further by the recovery elsewhere in Europe. Macron’s victory in France is likely to lead to vastly better relations with the EU. Recent opinion polls have also shown a drop in support for the populist anti-establishment parties in the forthcoming German and Italian elections. All of this is contributing to a reinvigorated sense of unity within the union.

The risk of Greece collapsing is relatively low in the short run because of the ECB continuing to buy assets and support for establishment parties returning. It is likely that the EU and IMF will continue to keep the country afloat but it is difficult to predict how long this will last. It is fairly unlikely that Greece will ever receive the substantial debt relief it would need to avoid crippling austerity. As such, in our opinion concerns of an imminent default are likely to fade but certainly will not subside for some time.


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