Do markets care about U.S. impeachment proceedings?

On the latest edition of Market Week in Review, Quantitative Investment Strategist Dr. Kara Ng and Research Analyst Puneet Thiara discussed potential market implications of the U.S. impeachment inquiry and the Hong Kong protests. They also spoke about the developments in China-U.S. trade negotiations as well as the latest Chinese economic data.

Impeachment hearings and market performance: Is there a correlation?

The impeachment inquiry into U.S. President Donald Trump and the ongoing protests in Hong Kong have made headlines for the past few weeks, but Ng said neither is likely to have much of an impact on global markets.

"In the U.S., the relationship between impeachment proceedings and the stock market is mixed," she said, explaining that the market tanked during the Watergate scandal in the 1970s, but rallied in the late 1990s amid the impeachment probe of former President Bill Clinton. Ultimately, what appears to matter more to markets is the state of the underlying economy, in addition to market fundamentals, Ng observed.

Turning to the Hong Kong protests, she said that while they’ve been very disruptive to the local economy, they aren’t impactful enough to derail the global business cycle. "If there is a further escalation in the protests, and the market overreacts with a selloff, a potential buying opportunity may exist," Ng remarked.

However, she cautioned that the China-U.S. trade situation remains a wild card with respect to geopolitical headlines. For instance, if the U.S. were to condemn China over the Hong Kong protests and link the protests to the trade war, progress toward a phase one trade deal between the two nations may unravel, Ng explained.

Markets in wait-and-see mode as China-U.S. trade negotiations continue

Zeroing in on trade in particular, Ng said markets are still waiting for clarity on trade negotiations between China and the U.S. "Over the past few weeks, there had been a growing sense of optimism that the two countries were on the same page in regard to trade, but lately, signs of a divide have cropped up," she noted. These include a disagreement over the amount of agricultural purchases China would make, as well as confusion over whether or not President Trump will roll back existing tariffs if a deal is struck.

"Basically, the market is in wait-and-see mode," Ng remarked, adding that in her view, the probability that the U.S. and China reach an agreement on trade remains higher than the probability that they don’t.

Chinese economic data disappoints, but brighter signs may be emerging globally

Recently released economic numbers from China were a disappointment, Ng said, with retail sales, industrial production and fixed-asset investment all coming in below consensus expectations.

What contributed to this weakness? Ng suspects that tariffs imposed by the U.S. in September on another $250 billion worth of Chinese goods are to blame, in addition to a slump in spending ahead of the country’s Singles’ Day shopping holiday, which occurred on 11 November. "All in all, this weakness is probably just a soft patch," she said.

In addition, tentative evidence now exists that the worldwide manufacturing slowdown is nearing the bottom, Ng said. "Inventories are being drawn down at an accelerated pace, and new orders have improved slightly," she stated, "and both these developments are positive for the global economic outlook going forward."

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.