The US justice department has formally opened a criminal investigation into a woman who accused former President Donald Trump of sexual misconduct. This development marks a significant escalation of what is rapidly becoming a full-blown political storm. The accuser, whose identity remains sealed under gagging orders, now faces potential charges of perjury and obstruction of justice.
From the City of London, this looks like a classic case of asymmetric risk. The accuser has seen her credibility severely downgraded, while Trump's political portfolio enjoys a sudden surge in value. The timing is impeccable, coming just as the Republican primaries begin to heat up.
Market participants are watching this closely, not for the legal proceedings themselves, but for the volatility they inject into the political landscape. Political uncertainty is a known negative for risk assets, but this particular event seems to be deflating the 'Trump liability' premium. If his legal troubles continue to dissipate, we could see a re-rating of his political stock.
Capital flight into safe havens like US Treasuries has been notable, with the 10-year yield dipping slightly on the news. This suggests that while the market is not panicking, it is pricing in a higher probability of a Trump victory in 2024. The fiscal implications of that scenario are sobering, given his previous profligacy.
The justice department's decision to pursue this investigation is a significant departure from the norm. Typically, such matters are handled at the state level. This federal intervention adds a layer of complexity and raises questions about the independence of the department under the current administration.
Inflation expectations remain anchored for now, but a protracted legal battle could weigh on consumer sentiment and slow economic activity. The Fed will be watching these developments closely, as any fiscal stimulus from a potential Trump administration would necessitate tighter monetary policy.
Gilt yields in London have also felt the ripple effects, with the spread between US and UK debt widening slightly. This reflects the market's assessment that the US political risk is unique to that jurisdiction, but the contagion through global financial channels is real.
Investors should brace for more two-way action in the coming weeks. The legal system moves slowly, but the political market is notoriously fast. The bottom line: this is a tail risk event that has become a core part of the portfolio. Hedge accordingly.
