How Political Unrest Makes America Look Like an Emerging Market, Even As Investors Ignore Events in Washington

Just because financial markets are not reacting to political chaos in Washington right now doesn’t mean investors can rest easy. US assets “are not traded like an emerging market … even though politics is becoming increasingly like an emerging market.” “Said Mark Rosenberg, CEO of political risk analysis firm GeoQuant, in an interview after last week’s assault on Capitol Hill by a violent mob that supported President Trump‘s attempt to overturn last year’s election.

The breaking of US political norms under the Trump presidency and damage to institutions has a long history, but if things don’t change, America’s preeminent position in global financial markets could one day be at risk, Rosenberg and other analysts warned. Capitol The vibrations of emerging markets were clearly illustrated by the events of the past week. President Donald Trump is accused of inciting a violent mob of his supporters to attack the Capitol on January 6 in a failed, but deadly, attempt to stop his opponent’s formal certification of his electoral victory last November. The House was expected to vote Wednesday to impeach Trump. Several Republican lawmakers were expected to join with Democrats in passing the impeachment article. Trump’s fate in the Senate, where a two-thirds majority would be required to convict, remains unclear. Senate Majority Leader Mitch McConnell, R-Kentucky, reiterated Wednesday that any Senate vote to remove Trump from office would come after Biden becomes president. Regardless, it looks like Trump will become the first president to be impeached twice by the House of Representatives, and financial markets have barely reacted to the turmoil, undeterred. Shares on January 6, the day after the riots, remained positive, with the Dow Jones Industrial Average DJIA, + 0.04% closing at a record high. US Treasuries, a traditional haven during periods of uncertainty, have instead been sold, boosting returns as investors become more concerned about the potential inflationary implications of Biden’s expansive fiscal agenda . Stocks mostly rose in choppy trade Wednesday as the House debated impeachment, with the Dow gaining about 65 points, or 0.2%, and the S&P 500 SPX, + 0.29%, not. far from all-time highs. Analysts said investors are more concerned about slowing efforts to approve additional aid spending than about the outcome of the impeachment process itself. Read: A second impeachment trial against Trump? How do stock investors weigh a key political moment? Fever or warning? Philip Marey, an American strategist at Rabobank, said the crucial question is whether the Capitol riot marked “the culmination of civil unrest in the United States, or [was] Just another warning sign that the country is headed for worse? For some observers, the market calm is justified. “If you consider that the events wiped out any remaining chance that Trump (or one of his family) could survive in 2024, then the events are perhaps ‘positive’,” said Steven Barrow, head of strategy for the G-10 in London. -based on Standard Bank, he told MarketWatch in an email. In fact, for some investors, the end of Trump’s term and the four years of impromptu tweets and announcements that often caused volatility in financial markets is a good thing. Instead, the political risks will again come from outside the United States rather than from Washington, they said. And Barrow argued that investors have long known that the American political system is more prone to crises, such as periodic government shutdowns that are unknown in other developed countries. . In fact, the political risk index based on data from GeoQuant itself has shown a 0.9 correlation with the S&P 500, meaning that stocks have tended to rise as measures of political risk increased. “That tells us that either political risk is effectively irrelevant to the equity markets or that a major reckoning is coming,” Rosenberg said. So far, the state of US markets as a safe haven during periods of economic or market uncertainty appears largely intact, analysts said. That status reflects the role of the United States as the world’s largest economy and the deep liquidity of the US Treasury bond market, analysts said. Meanwhile, the US dollar remains the world’s reserve currency, a role that was underscored last February and March when the COVID-19 pandemic triggered the close close of credit markets, resulting in a global scramble for banknotes. green. That role is a major advantage for the US economy, helping to ensure a steady global demand for US debt and other assets.But the US dollar could also be a place where cracks could arise. Rosenberg said that the performance of the dollar, as measured by the ICE US Dollar Index DXY, + 0.30% and, in particular, the euro / dollar EURUSD, -0.43%, has had a significantly negative correlation with GeoQuant’s measure of political risk. American since January. 2020 (see chart below).

GeoQuant

“Only a fool would say that the dollar is on the verge of losing its reserve currency status, but I think you can see in our data a relationship in which increased political risk and institutional risk and political uncertainty are beginning to hurt. to the dollar relative to gold, relative to bitcoin, “he said. Rabobank’s Marey, in a note, argued that the short-term calm on the political front will likely prove short-lived thanks to decades of increasing political polarization that has made the Democratic and Republican parties more rigid, classifying themselves along ideological lines (liberal versus conservative), race and geography. “If the United States does not find a way out of this route of increasing polarization, we will only see a new escalation of civil unrest,” he said.