Flight to Safety Eases with Tax Reform Progress

Today US financial markets deviated from the risk-off sentiment that has characterized trading flows over the past week, as investors seemed to be encouraged by news of progress on tax reform.  This morning it was reported that members of the Trump administration and key lawmakers significantly advanced the discussion on a tax overhaul which would cut rates for both businesses and individuals.  Specifically highlighted details of the plan included limiting the mortgage interest deduction for homeowners, removing the state and local tax deduction for individuals and eliminating interest deductions for businesses in exchange for lower tax brackets.  As one of the primary pillars of the Trump campaign, tax reform is a top priority, which probably has an increased importance given the administration’s recent inability to repeal Obamacare or other legislative priorities.  Also looming as hindrances to progress are the investigation into the election interference by Russia, ongoing turmoil over Charlottesville, and continuing tensions with North Korea.

 

 

All three major US stock indices climbed between 0.9%-1.4% on the day, with the majority of defense stocks posting notable gains following President Trump’s speech last night on military policy going forward in Afghanistan.  Treasurys sold off from the beginning of the trading session and yields/swap rates are currently up 1-4 bps across the curve, bringing the yield on the 10-year note up to 2.21%.  The US dollar finished 0.4% higher against major currencies, highlighted by a 0.6% rise against the Japanese yen.  In commodities, crude oil prices held near unchanged for the session while gold futures declined 0.4% as the flight to safety eased.  Tomorrow, investors will receive their first meaningful economic data release of the week in the form of new home sales for July (610k expected), which will be followed by existing home sales (5.55mm expected) released on Thursday.