U.S. tax bill, Russian probe whipsaw financial markets

By Rodrigo Campos

NEW YORK (Reuters) - U.S. stocks, the dollar and Treasury yields sank on Friday after an ABC report said former national security adviser Michael Flynn was prepared to testify that Donald Trump instructed him to make contact with Russians during the presidential campaign.

The sharp moves partially reversed after U.S. Senate Republicans said they had enough support to pass a tax overhaul bill later in the day.

The S&P 500 closed at a record high on Thursday partly on hopes of passage of the Senate bill, expected to cut corporate taxes.

"It looks like (the moves in markets are) a reaction to news that Flynn is prepared to testify against Trump," said William Delwiche, investment strategist at Robert W. Baird in Milwaukee.

"You step back and look over the move we have had over the last week and a half, you could argue we are due for some sort of pull back or consolidation."

Reuters could not immediately verify the ABC News report on Flynn's testimony, which would put the Republican president in an uncomfortable spot after he has denied any collusion between his campaign team and Moscow.

Flynn also pleaded guilty to lying to the FBI about contact with Russian officials. His reported decision to cooperate with the investigation led by Special Counsel Robert Mueller marked a major escalation in a probe into Russia's alleged attempts to influence the 2016 U.S. presidential election.

If the Russia probe derails the tax legislation, it could hurt the chances of Republicans retaining their majorities in the House and Senate as voters go to the polls next year.

The Dow Jones Industrial Average (DJI) fell 79.9 points, or 0.33 percent, to 24,192.45, the S&P 500 (SPX) lost 10.36 points, or 0.39 percent, to 2,637.22 and the Nasdaq Composite (IXIC) dropped 43.26 points, or 0.63 percent, to 6,830.71.

The S&P earlier fell as much as 1.6 percent.

The pan-European FTSEurofirst 300 index (FTEU3) lost 0.74 percent and MSCI's gauge of stocks across the globe (MIWD00000PUS) shed 0.38 percent.

Emerging market stocks lost 0.34 percent. MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) closed 0.08 percent lower, while Japan's Nikkei (N225) rose 0.41 percent.

The dollar index (DXY) fell 0.15 percent, with the euro down 0.1 percent to $1.189.

"To the extent that this (Flynn) headline further ensnares this administration into this investigation or suggests a widening of the Special Counsel’s probe I think that it is certainly a key concern for global investors and that’s why we are seeing the dollar come off," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

The Japanese yen strengthened 0.40 percent versus the greenback at 112.10 per dollar, while sterling was last trading at $1.347, down 0.41 percent on the day.

Benchmark 10-year notes (US10YT=RR) last rose 15/32 in price to yield 2.3615 percent, from 2.415 percent late on Thursday.

The 30-year bond (US30YT=RR) last rose 49/32 in price to yield 2.7546 percent, from 2.831 percent late on Thursday.

Crude futures rose a day after OPEC and other major producers agreed to continue reining in output until the end of 2018 to try to reduce a global oil glut and boost prices.

U.S. crude rose 1.52 percent to $58.27 per barrel and Brent was at $63.63, up 1.6 percent on the day.

Spot gold added 0.6 percent to $1,281.91 an ounce. U.S. gold futures gained 0.63 percent to $1,284.80 an ounce.

Copper rose 0.81 percent to $6,816.50 a tonne.