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Trump's Troubles and the Markets

Trump's Troubles and the Markets
(Valiantsin Korznikau/Dreamstime)

Wednesday, 22 August 2018 09:15 AM Current | Bio | Archive

Donald Trump has suffered a serious double blow after one of his former associates pleaded guilty and another was convicted of financial crimes, potentially leaving the President himself in legal jeopardy.

President Trump faces either double trouble or a witch hunt, depending on which interpretation of events one wishes to use.

President Trump’s former lawyer, Michael Cohen, has pleaded guilty to breaking campaign finance laws with Cohen saying that this was at the direction of President Trump.

Lanny Davis, Cohen’s lawyer tweeted: “Today he stood up and testified under oath that Donald Trump directed him to commit a crime by making payments to two women for the principal purpose of influencing an election. If those payments were a crime for Michael Cohen, then why wouldn't they be a crime for Donald Trump? 5:06 PM - Aug 21, 2018”

President Trump’s former campaign manager, Paul Manafort, was convicted on 8 counts of fraud and related charges. Manafort was found guilty of bank fraud, tax fraud and failure to report a foreign bank account. Manafort faces additional charges in a separate case, to convene in Washington DC next month. Despite his conviction on federal charges, Trump called Manafort a “good man.”

So, what does this mean for financial markets?

Directly, these matters if politics impact either U.S. policy or the markets view of the risks around U.S. Policy.

The seriousness of the charges and the fact that they come so close to President Trump might be supposed to undermine the President’s political capital with Congress.

That would matter if the president’s political capital with Congress were politically high, which it is probably not.

It would matter if President Trump was pursuing policies which Congress did not wish to implement. That is when political capital is needed. That is also not the case at the moment.

Politics might matter if events were supposed to impact the forthcoming midterm elections in November. The structure of Congress would have consequences for policy.

The risks here are perhaps not clear.

President Trump is not a mainstream Republican and Republican members of Congress may be able to distance themselves from the president in a way that they could not do from, say, President Richard Nixon in the 1970s. The polarized nature of U.S. politics may mean that the President supporters are now even more motivated to turn out and vote.

President Trump also tends to be successful when campaigning ‘against’ something.

The politics might matter if economic policy is used as a distraction. This is where trade risks come in.

The U.S. president has very considerable power over trade policy and taxing U.S. consumers via trade taxes (tariffs) can be made to serve the ‘Make America Great Again’ slogan.

To that extent, the U.S. administration may feel that increased trade tensions are a way of hiding domestic political troubles.

The market reaction overnight seems relatively reasonable in its restraint. The dollar weakened but is not collapsing.

However, international investors are more likely to react to extreme political outcomes like impeachment than are domestic investors. It is a general rule that international investors do not understand politics as well as domestic investors do in any country and that international investors overreact to political events.

That is true in any country, but it matters when some markets are internationally driven like the U.S. dollar and other markets are more domestic investor driven like U.S. equities.

While Trump’s troubles may cause a temporary reaction in the dollar, I still believe that conditions remain in place for further near-term dollar strength.

Global trade and other political tensions remain well in place and brinkmanship over trade is unlikely to subside at least until after the mid-term U.S. elections in November.

The dollar, along with the yen, should remain the main beneficiary of risk aversion arising from the trade conflict while interest rate differentials will continue to favor the dollar. I still expect two more Fed rate hikes this year.

Brexit Enters Final-Stage Negotiations

Elsewhere, the European Union (EU) and the UK have announced that negotiations over cutting the European Union off from the UK will now go on ‘continuously.’ The interminably tedious process has now become interminable tedious and continuous. It’s a rather dispiriting thought.

It also means that there are more opportunities for posturing and headline seeking statements which will give ‘continuous’ rather than periodic noise to the financial markets.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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The politics might matter if economic policy is used as a distraction. This is where trade risks come in.
trump, troubles, markets, investors
Wednesday, 22 August 2018 09:15 AM
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