Risk Assets Decline on Michael Flynn Report

Flynn Prompts Flight to Safety

Former national-security adviser Mike Flynn rattled financial markets today after pleading guilty to lying to the FBI about his communications with Russian ambassadors during Trump’s presidential campaign last year.  It was also reported that Flynn would be cooperating with Robert Mueller’s special counsel probe, prompting speculation that he would provide testimony that may implicate Trump or one or more of his senior aides as having directed Flynn to make contact with Russia.  Flynn’s plea agreement could land him in jail for up to 6 months, depending on the level of “substantial assistance in the investigation or prosecution of another person who has committed an offense” he provides.

 

 

US stocks gapped lower following the report, with the S&P 500 declining as much as 1.5% before recovering the majority of losses to finish down 0.2% on the day.  Treasurys rallied sharply in a fear response to the Flynn news, as yields/swap rates declined 1-7 bps across the curve in a bull flattening pattern.  The yield on the 10-year note is currently near 2.36%, down 5 bps after falling by as many as 10 bps right after the release of the Flynn news.  The US dollar weakened 0.3% against major currencies – its first decline in a week.  In commodities, crude futures built upon the positive momentum from yesterday’s agreement between OPEC and its allies to extend existing production cuts.  A barrel of WTI is trading 1.65% higher on the day to $58.35.  Gold futures recovered the majority of the losses from yesterday’s session, up 0.5% to $1,280/ounce.

 

 

Republicans Getting Closer on Senate Tax Bill

The unexpected news surrounding Flynn overshadowed a productive day for Senate Republicans, who now claim that they will have the required votes to pass their version of the tax reform bill.  Susan Collins, the Senator of Maine, is the most recent Republican to have a change of heart on the new bill, after revisions were made to the plan to include state and local property tax breaks, lighter measures for medical expense deductions and catch-up contributions for certain public employees.  The updated benefits are expected to cost more than $300 billion over the next ten years – an amount which would be paid for by the re-inclusion of the Alternative Minimum Tax and an increase to the proposed tax rate on multinational corporations.