Midterm Elections may be more important than the alleged crimes

Michael Cohen has already pleaded guilty to campaign finance violations, which he implies Donald Trump instructed him to commit. This is the only serious crime which has so far been alleged, and whether or not it would amount to an impeachable offense.

If evidence of collusion with Russia was proven to have occurred, with Trump’s knowledge or involvement, that would probably qualify as treason – but so far no concrete evidence has been suggested. There is endless speculation of other crimes he could be charged with, but again, no concrete evidence has been presented publicly.

It seems clear that Trump’s enemies are keen to see him removed by any means possible. Meanwhile, the GOP appears happy to defend him as long as his base supports him. That means the makeup of the House and Senate is of critical importance. If the Democrats control the House (with 51%), they may push forward regardless of how strong their case is. They will struggle to get 67% of the votes in the Senate (unless they somehow win over 60% of the Senate seats, but they may push forward regardless). This would be likely to result in a long, disruptive process.

The outcome of the mid-term elections in November is therefore of critical importance. Regardless of the strength of the case against Trump, there’s a good chance impeachment proceeding will begin if the Democrats win more than half the seats in the House. If they don’t, the probability is far lower.

How will markets react?

The common belief is that if a strong case for removal of the President by impeachment exists, a President will resign rather than face the humiliation of being impeached and removed. However, Donald Trump is a fighter and may be inclined to fight regardless of the case against him.

There is also the possibility of a weak case being made, the possibility of the House remaining in GOP hands and the possibility of new more serious charges emerging. In other words, there are several possible scenarios that could play out.

For markets, the worst-case scenario would be a long drawn out impeachment trial. Regardless of the outcome, the process would be disruptive and would lead to uncertainty. Impeachment proceedings would distract from other issues being dealt with by US lawmakers. They may even lead to geopolitical instability if Trump was seen as weak.

That sort of scenario would be bad for emerging markets and their currencies, which have already had a bad year. On the flipside – it would probably be good for safe-haven assets, and even for the US Dollar. It may also allow Jerome Powell to continue raising rates without any pressure from the President.

For the US economy and equity market, the effect of impeachment proceedings would depend on their effect, if any, on trade relations. For the most part, the US stock market is strong and corporate earnings continue to grow. The trade war is only affecting certain parts of the economy. Tax cuts and deregulation have already been enacted and unless there was a clear path toward his policies being reversed, corporate profits would be safe. That said, if impeachment proceedings were to begin, there would probably be an initial sell-off followed by a period of volatility.

In the event of Trump suddenly resigning, there may be an initial selloff of any risk assets including equities and emerging market currencies, but it would likely be short-lived. VP Mike Pence would take over and his priority would be to provide stability. This may actually provide a buying opportunity for emerging market currencies.

In the event that nothing happens – no impeachment and no resignation – which may still be the most likely scenario – then markets will remain focused on the emerging market rout and trade relationships around the world. In fact, over the next six months, the focus may even move to the UK’s Brexit and its effect on the UK and European trade.