Global equity markets came under pressure on Thursday, after a sell-off in the US markets on concerns President Trump is now under further scrutiny for allegedly asking former FBI director James Comey to 'let go' his investigation into former National Security Advisor Flynn. The former FBI chief is to testify to Congress on Wednesday next week.
Also Read: The criminal President?
Nikkei, Stratis Times, Hang Seng and KOSPI traded 0.5% - 1.6% lower on Thursday. Back home, the S&P BSE Sensex and the Nifty 50 indices slipped around 0.5% each in intra-day deals.
On Wednesday, the Dow (down 370 points) and S&P 500 (down 1.8%) recorded their worst day since September 2016. The NASDAQ composite also posted its worst session since June 24, slipping 2.6% to close at 6,011 levels.
Also Read: Stocks sell off on US President Trump concern; dollar at November level
Going ahead, analysts expect the global equity markets to remain choppy till the former FBI chief testifies to the Congress, which may put impeachment expectations further in the spotlight.
"The question is if markets will calm down, or panic more, on this combination. Certainly, the obvious point we've made before repeatedly is that Trump now has much less political capital to spend in the Capitol, and that makes Trumpflation far less likely. However, counter-balancing that, we now have a pause until Wednesday," notes Stefan Koopman, market economist at Rabobank International.
Analysts at Nomura, on the other hand, believe that given these developments, stimulus plans to rev up the economy more likely to be derailed than the presidency itself.
Also Read: Trump scandals reaching Watergate size and scale: Republican John McCain
"Impeachment still seems a distant prospect, meaning negative market effects are likely to be more limited over the medium term. Meanwhile, the negative impacts that the latest developments have on Trump's ability to pursue his policy agenda could be more important for markets. The probability of impeachment seems low," says Kevin Gaynor of Nomura in a co-authored report with Sam Bonney, Jordan Rochester and Yujiro Goto.
"As with the forex markets, especially how the dollar has traded lately, bond markets have been equally sceptical of President Trump's economy policies being fully put in place anytime soon. Therefore, any sort of delay or new distractions will likely further push back fiscal stimulus prospects and that means less support for the economy, and all else being equal potentially for equity markets. For the US Federal Reserve (US Fed), we do not think this will derail a June rate hike in view of the latest job numbers," they add.
As regards the Indian markets that have run-up nearly 20% since their December 2016 lows, analysts there is a reason to be cautious in this backdrop.
Also Read: Trump's Russia link: Former FBI head Robert Mueller to oversee probe
"Markets don't like uncertainty and the development in the US has certainly created nervousness. If the situation aggravates and prolongs, we can see the Nifty50 index slip to 9,200 levels going ahead, which is a good support level for the index. If this is breached on the downside, the next support levels are below the 9,000 mark," says U R Bhat, managing director, Dalton Capital Advisors.
Besides global cues, analysts are also keeping a tab on a lot of other variables at the domestic level - monsoon, goods and services tax (GST) bill implementation, corporate earnings etc - that will also have an impact on the sentiment going ahead.
"If the global markets were to fall sharply, say with the S&P hitting 2,100 levels, the developments in the US can trigger a sell-off across global markets. Having said that, I will not write off the 'Trump trade' at this point. However, if the US event does last long, it will dent our inflows and will also impact flows from the domestic investors. At that point, local factors, such as progress of monsoon, GST bill implementation, growth in corporate earnings etc will come into play," says Tirthankar Patnaik, India Strategist at Japan-based Mizuho Bank.