Photo: Brendan Hoffman/Getty Images
Today the Fiscal Cliff debate moves to the House of Representatives.The Senate overwhelmingly passed the deal late last night (around 2 AM).
While passage is expected in The House, there is A LOT of conservative frustration with the fact that A) taxes are going up B) basically nothing is done on the spending side.
So there are a lot of folks hwo hate the bill. On the flipside, killing the bill by voting NO would be a political disaster.
So what might happen?
Citi’s Steven Englander breaks down the three scenarios:
1) A close vote before 6PM – Asian markets open up, catching up to the Monday S&P move; S&P futures probably have priced in most of the benefit of the fiscal cliff resolution. EUR CAD, and AUD have a bit of catching up to do with the S&P, but there should be little drama
2) A rancorous debate that extends into the night – again the key will be whether the votes are there, however, reluctantly, but if it looks as if support is waning we will see sharp moves in markets. With brinkmanship the new normal, the sell-off will be partial on the view that a last minute rabbit will be pulled from a hat.
3) Amendments or rejection – markets will sell off sharply. If it turns out that the House can’t vote ‘yes’ on an acceptable, yet inelegant fix, the confidence that has emerged in 11th hour fixes will dissipate and tail risk scenarios will shift into baseline outcomes. This would be USDJPY negative, but risk-correlated currencies now price in 80-90% probably of a successful fix in our view, so the downside pressures will be large.