Abu Dhabi, UAEFriday 6 December 2019

Why a Trump impeachment may inflict further blows to financial markets

The global economy is already under pressure from trade wars, Brexit and geopolitical woes

President Donald Trump gave his blessing for a Turkish operation against Kurdish forces in northern Syria, saying the United States will stand aside as Ankara launches its "long-planned" operation. EPA
President Donald Trump gave his blessing for a Turkish operation against Kurdish forces in northern Syria, saying the United States will stand aside as Ankara launches its "long-planned" operation. EPA

If a trade war, geopolitical tensions and Brexit were not enough, last week saw an impeachment process begin against US President Donald Trump. As well as carrying risks in its own right, the move could also inflame many of the existing uncertainties that continue around the world.

With a new month about to start, there are plenty of impending risks for markets to contend with in the final quarter of the year in almost every part of the world, from the US-China trade dispute, the UK's ongoing Brexit saga and geopolitical concerns in the Gulf. While central banks delivered moves to accommodate the uncertainty, controversy about many of those steps also increased.

Central banks have also been hard at work attempting to prevent what appears to be an impending reversion back into recession.

Tim Fox, Emirates NBD

US-China trade prospects appeared to brighten through September, with some signs of a rapprochement on both sides. China permitted tariff waivers for US soybean imports, while the US also delayed the imposition of some tariffs. However as September comes to an end, the rhetoric is once again becoming heated with Mr Trump, speaking at the United Nations, saying that he would not accept a bad deal with China, which tempered recent optimism for an October agreement.

The Brexit drama also continued to play out negatively through September, with the acrimony intensifying and still no end in sight. While Parliament instructed Prime Minister Boris Johnson to request an extension to the October 31 deadline if no deal can be negotiated by October 19, the likelihood of this happening remains uncertain. Mr Johnson is reportedly examining loopholes to this legislation, while seemingly running out of time to negotiate a deal with the EU over the Irish backstop.

The loss of a parliamentary majority by Mr Johnson maintains the ever-present threat of a government collapse, pointing the way to a general election before the end of the year but not before an interim government led by opposition leader Jeremy Corbyn could take over. However brief this might last, it is hard to quantify the damage it could do to UK financial markets.

The surge in crude oil prices following drone attacks on Saudi Aramco facilities in Saudi Arabia also highlighted how critical the Middle East remains as a supplier of crude oil to international markets. Saudi Arabia’s energy industry leadership stressed that any interruption to supplies will be short-lived and production will be back at pre-attack levels only a few weeks after the incident. But anxiety over the security of supply will remain widespread in oil markets. Regardless of how quickly the repair work can be completed, oil importers are re-examining their reliance on flows from the Middle East and accelerating a path of diversifying the origins of their crude supplies.

Central banks have also hard at work too, attempting to prevent what appears to be an impending reversion back into recession. Manufacturing sectors all over the world are clearly suffering, mostly as a consequence of the trade wars, but the risk remains that they begin to infect confidence in the non-manufacturing sectors as well.

Unfortunately, central banks are running out of room to do much more, especially in the eurozone, and the debate about monetary policy is itself becoming heated. In the US it is also becoming politicised by Mr Trump’s persistent pressure on Federal Reserve chair Jerome Powell to cut rates further. All of this while the repo market spiked to 10 per cent this month, before slipping back to around 2 per cent after the New York Fed conducted a number of rounds of overnight and a three-day repos to try to alleviate pressures. While this instability was probably not yet advance warning of a breakdown in the broader financial system, additional disturbances cannot be ruled out.

Now the threat of Mr Trump's impeachment adds to all of this. On its own the markets might be inclined to question whether it matters, with the election still well over a year away. However, it will be Mr Trump's reaction to the move that could see the impact felt much sooner. Tensions with China could easily become inflamed, as they might also with America’s other adversaries, with the consequence that trade wars remain intense and geopolitical relationships deteriorate even further. This will only put more pressure on the global economy and financial markets.

Tim Fox is chief economist and head of research at Emirates NBD

Updated: September 29, 2019 12:28 PM

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