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For now, what's bad for Trump is seen as bad for markets. But as the chatter around impeachment grows, investors may eventually decide they are better off without him.
This week's revelation of memos that seem to offer prima facie evidence of the Trump obstructing justice jolted markets. Added to recent reports of the US president revealing secrets to the Russian foreign minister and ambassador, the interpretation was the chance of an impeachment had jumped from improbable to possible.
"The thought of President Trump being impeached has traders (and us) spooked," CBA bond strategists Adam Donaldson and Philip Brown wrote on Thursday, the day after the S&P; 500 index had suffered its worst night of trading in eight months.
"One point is stunningly self-evident," CLSA strategist Christopher Wood says. "The latest developments have not encouraged hopes of a speedy implementation of tax reform."
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What's more, when it comes to the intemperate Trump, "there is a real risk of him going down tweeting".
A special prosecutor – with a reputation for independence – was appointed to look into the Trump-Russia links and to determine if anything illegal had gone on. That investigation could potentially result in hard evidence of the "treason" or "high crimes and misdemeanours" required to trigger an impeachment process.
Remote scenario
It's an outcome that "cannot be ruled out completely", Citi chief global political analyst Tina Fordham says.
Can't be ruled out, no. But still a remote scenario.
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Fordham points out that "to date no US President has been impeached by his own party, and given the highly charged partisan environment, we think that evidence of a breach deemed sufficient to trigger impeachment proceedings would have to be very robust".
So the current consensus is that heightened US political risks threaten the delivery of market-friendly policies. And the more the controversy around Trump builds, the worse it is for the sharemarket. This is the "delayed-policy-agenda" trade. For example analysts, including Citi's Fordham, are upping their warnings that tax reform has the potential to be a 2018 story.
I mentioned the fact that Wall St mid-week had its worst session since September. That's less dramatic than it sounds: the S&P; 500 lost 1.8 per cent. It was only earlier in the week that the index crossed 2400 points for the first time. By contrast, the US dollar index has unwound all its post-election gains, while Treasury yields have pulled well back from their March highs and have given back around half of their gains since November.
So you can imagine that, if the bond and currency market is any guide, there is still some room for the Trump trade to be priced out of US stocks, even if the economy continues to build strength as expected over the coming months.
Adjusted tactics
But the the word "impeachment" is likely to keep coming up, and that will also take its toll, CBA's Donaldson and Brown reckon.
They are adjusting their tactics to reflect the heightened uncertainty, but sticking with their long-term strategy.
"Our previous stance was that the underlying economics would eventually drive the US yields higher and the Australian curve steeper," they write, referring to the idea that longer-term rates would rise in line with the global trend, while shorter-term ones would remain relatively anchored to the RBA's apparent determination to keep rates steady.
"However, now that there is a realistic, though still small, chance of impeaching a president in the next few months, we think discretion is the better part of valour," they say. "Politics will trump economics for the time being."
My favourite line to emerge over the past couple of days is the idea that even if Trump is impeached and/or resigns, well, wouldn't we really all prefer vice-president Mike Pence anyway? As a GaveKal analyst says, in that instance "markets may quickly focus on 'Trump without the bad stuff'".
Let's call it the everything-will-be-peachy-if-Trump-gets-impeached trade. Or, more economically, the Impeach Trade. When heightened chances of impeachment start to correlate with rising sharemarkets, then you know the script has well and truly flipped, Trump is seen as a liability rather than a potential source of support for the market, and the Impeach Trade is on.
Watergate scandal
That may sound ridiculous, but looking back at the most common historical reference of recent days – Richard Nixon and the Watergate scandal in the 1970s that led to his resignation on August 9, 1974 – there is some evidence to support it. Indeed, investors back then had also cottoned on to the idea that the dead duck president was weighing on the sharemarket.
At an institutional investor conference held in March of 1974, The New York Times interviewed a dozen attendees on what they thought would happen to the stockmarket if Nixon were to resign. Eight said that it would "have an immediate effect of sending stock prices higher", the Times reported. Two were undecided.
They got the timing wrong, but the overall direction right. By August 9 of that year, Nixon did indeed resign. The market continued to fall for a little after the resignation, but reached a clear turning point shortly after, as the charts show. Bond yields trod a similar path.
For now what's bad for Trump looks bad for markets. That's normal and to be expected. But when that relationship is reversed, then markets will really be sending a signal: investors see a path to an early end to his presidency, and they like it.