(Bloomberg) – Traders are bracing for the fact that US House Speaker Nancy Pelosi is expected to visit Taipei on Tuesday to heighten tensions with China, with stocks sliding and havens. Global Yen and Treasuries escalate.
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Taiwan’s benchmark stock index fell 2.1%, Hong Kong and China shares tumbled, while the Japanese currency touched a two-month high. Yields on the 10-year Treasury note fell on Thursday and hit 2.5%, levels last seen in April. The Taiwanese dollar hits its lowest level since May 2020.
Pelosi’s trip is creating a new pressure point for investors already dealing with the prospect of a U.S. recession, interest rate hikes around the world and rising inflation. Tuesday’s moves show traders are hedging against escalating tensions, with analysts warning of the consequences of a conflict between the world’s two largest economies that is wreaking havoc on global markets. bridge.
“Some economic backlash against Taiwan is inevitable, or else China will lose face after all,” said Alvin Tan, head of Asian currency strategy at RBC Capital Markets in Singapore. threats. “Risk appetite will remain cautious, with the greatest anxiety focusing on the expanding Chinese markets, but beyond that, we need to see a concrete response from China.”
China considers Taiwan part of its territory and has promised “severe consequences” for what the highest-ranking US official sets foot on the island in 25 years. Taiwan is an important supplier for semiconductors and other high-tech goods.
Some are warning of possible consequences. The concern is that the trip and China’s response to it worsen the longer term relationship on trade and play out in markets for many years, said strategists Ian Lyngen and Benjamin Jeffery of BMO Capital Markets. weeks or more, with implications for Treasuries. They wrote in a report that yields on the 10-year benchmark could breach 2.5% this week.
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The White House has sought to defuse rising tensions, insisting there is no change in its position on Taiwan and urging Beijing to refrain from aggressive responses. The United States outlined an analysis of actions China could take, including firing missiles into the Taiwan Strait, launching new military operations, and crossing the unofficial no-fly zone between Taiwan and Taiwan. Loan and mainland.
The one-month risk reversal for the Taiwan dollar – a measure of the expected direction of that timeframe – rose to its highest level since May, signaling traders are betting the island’s currency will weaken.
Despite the stresses, global risk assets have been relatively resilient. China’s offshore yuan was little changed on Tuesday. S&P 500 futures were down just 0.5%.
“The expectation is that China’s response will mostly be limited to some signaling action, rather than something really damaging to its economy, and so at this stage we I think the market reaction so far has been relatively mild,” Becky Liu, head of China macro strategy at Standard Chartered Bank Plc, told Bloomberg Radio. “We just need to be concerned with the medium and long-term effects.”
China stocks fall on geopolitical risks, growth concerns
Taiwan Semiconductor Manufacturing Co., the world’s largest chipmaker, fell 3.1%. Shares are down about 20% this year with Taiwan’s stock benchmark down about 19%, slightly worse than the 17% drop in the MSIC AC Asia Pacific index.
Pelosi could land in Taipei as soon as Tuesday, according to people familiar with the matter. Her trip follows a decades-long record against China for its human rights record and growing influence globally. As Speaker of the House, she is second in line to the US presidential line of succession, making her visit to the democratically-ruled island an unpleasant one for Beijing.
Pelosi’s Taiwan Trip Takes Over China Stocks, Raises UST: Street Wrap
However, investors may need to prepare for a tough reaction in financial markets that could underpin haven assets like Treasuries.
“Pelosi’s visit carries with it the assumption of a limited time frame for a tradable response; an assumption we would describe as misplaced,” wrote Lyngen and Jeffery of BMO in a note. “Any response could take weeks or more and for this reason, we anticipate that the geopolitical backdrop will once again contribute to the bullish underpinnings for the US rate market. “
(Updated levels. A previous version of this story corrected a typo by BMO strategist Ian Lyngen.)
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