FBI’s Clinton investigation is a ‘black swan’ that could swing the election: Citi

November 1st, 2016  |  Source: Marketwatch.com

The Federal Bureau of Investigation’s bombshell announcement Friday that it is reviewing additional emails as part of its probe into Democratic presidential candidate Hillary Clinton’s use of a private email server is a “black swan” that could be a game changer, a Citibank analyst warned.

“These developments do constitute an ‘October Surprise’ that could have a meaningful impact on the race,” said Tina Fordham, an analyst at Citibank, in a Monday note to clients.

Black swans are by definition events that are highly improbable but have major consequences in retrospect.

As a result of the FBI’s revelation, prediction market odds of a Clinton victory have declined to 75% from 81%, she said. Even before Friday, Clinton’s lead over Republican rival Donald Trump had narrowed to 5.6 percentage points on Oct. 27 from 6.4 percentage points on Oct. 20 in the Real Clear Politics average of major polls. On Monday, Clinton’s average lead was 2.5 percentage points.

Read: Clinton’s unfavorable rating hits new high in poll

http://www.marketwatch.com/story/clintons-unfavorable-rating-hits-new-high-in-poll-trump-targets-democratic-states-in-final-sprint-2016-10-31Also see: Post-FBI poll by Morning Consult shows Clinton keeping 3-point lead

On Friday, news of the probe, revealed in a letter by FBI Director James Comey to Congress, sparked a modest selloff in equities and a flight into haven assets like gold. On Monday, U.S. stocks traded flat to slightly higher. http://www.marketwatch.com/story/cautious-open-ahead-for-us-stocks-as-investors-watch-for-more-fbi-fallout-2016-10-31with investors appearing to pay more attention to falling oil prices, merger news and corporate earnings.

Citi is still betting on Clinton winning the White House on Nov. 8 and left probability of a Clinton presidency at 75%. However, the FBI news could depress voter turnout among Clinton supporters and affect down-ballot congressional races.

“These developments have added a significant obstacle to the Clinton campaign, and are likely to further dent voter confidence,” said Fordham, who had been consistently cautioning against taking a Clinton win for granted.

How exactly the latest news will influence the result is unclear as it takes a few days before such developments are reflected in the polls. But one thing is certain—uncertainty is expected to rise.

The CBOE Market Volatility Index VIX, +8.91% , known as Wall Street’s “fear gauge,” has been trading at elevated levels and is poised for a five-day gain. The index rose 5.2% to 17.03 on Monday, its highest reading since mid-September.

“We continue to emphasize the potential for more Black Swan events emerging, making things more complicated for forecasters and pollsters,” said the analyst.

Fordham said the FBI probe increases the risk that if Trump loses, he won't accept the results. And if Clinton wins, she will have to contend with a Republican-controlled or a divided Congress which raises the chances of additional investigations and “non-negligible” impeachment risk.

In other words, the election is shaping up to be a contest without a true winner.

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