Halister News

(Bloomberg) -- A Clinton win and split Congress may mean the Fed would remain on track for a Dec. rate hike, causing a marginal selloff in fed funds/OIS and short-end rates by +1.5 in 3-mo. tenor and +2.5 in 6-mo., Citi strategist Steve Kang said in note.

• Citi equity strategists est. 75% chance of Clinton win with split Congress
• Clinton win and Democratic sweep would be negative for U.S. equities, though wouldn’t be “significant enough to dent December probability”
• Other scenarios:
  • Trump win and Republican Congress could cause 3-mo. fed feds/OIS to move lower and equity markets to sell off 3-5% amid uncertainty around trade and foreign relations
    • Odds of Dec. rate hike and one increase in 2017 could both drop to 40% from 70%, which translates to -5/-7.5bp rally in 3-, 6-mo. fed funds/OIS
• Trump win would also come with repeal of Dodd-Frank regulations and “more scrutiny” on Fed’s regulatory powers
  • Would anticipate “comparably lower” bank balance sheet costs for repo, yet increases in deficit and total marketable Treasury debt could put upward pressure on repo rates
  • Higher deficit would result in more bills, which would put upward pressure on rates
• Long-term outcomes “much murkier,” as a Clinton victory may mean more banking regulations, especially around use of short-term wholesale funding, which would make dealer repos more expensive
  • O/N RRP usage would increase, with decline in CP/CD supply as banks are penalized for issuing short-term debt; could also cause Libor, CP/CD rates to move higher
• NOTE: Odds of Dec. rate hike at 82%, based on fed fund futures