Global financial markets whipsawed as risk sentiment remained fragile, with US House Speaker Nancy Pelosi’s Taiwan trip adding to the list of investor worries ranging from a restrictive Federal Reserve policy to the specter of an economic recession.
In a session of many reversals, the S&P 500 erased gains, while trading way off session lows. A gauge US-listed Chinese shares climbed 1.9%. Ten-year US yields soared to 2.74%, following a slide that drove them to around 2.5%. The Japanese yen slipped after touching a nearly two-month high. The yuan rose. Gold wiped out gains.
“It’s going to be volatile,” said Ellen Gaske, economist at PGIM Fixed Income. “Geopolitical risks are obviously elevated on a more persistent basis here. So I think that imparts a degree of volatility to markets, and that’s on top of the volatility in rates markets that we are already seeing because of the Fed being on the move, and because it is uncertain how far the Fed will actually have to go from here.”
Pelosi became the highest-ranking American politician to visit Taiwan in 25 years, prompting China to announce missile tests and military drills encircling the island that set the stage for some of its most provocative actions in decades.
Pelosi’s trip is creating a fresh pressure point for investors already dealing with the prospects of a US recession, worldwide rate hikes and surging inflation. The moves so far suggest traders are hedging against tension escalating, with analysts warning of the tailrisk of a conflict between the world’s two largest economies that wreaks havoc on global markets.
“China will show her displeasure by ratcheting up retaliatory actions, but it won’t get out of hand given its economy is weak,” said Rajeev De Mello, a global macro portfolio manager at GAMA Asset Management in Geneva. “However, the risk is if there is any military ‘incident,’ which could lead to an accidental military escalation, which would stress global financial markets.”
While the White House has sought to dial back rising tensions by insisting there is no change in its position toward Taiwan, which China considers as part of its territory, Beijing has called Pelosi’s visit a “dangerous gamble” with grave consequences.
Equity markets in China and Hong Kong were the worst performers in Asia as security analysts outlined potential military responses from Beijing. The Taiwan dollar hit its lowest since May 2020, before paring the drop on signs that local banks were selling the greenback to meet the needs of foreign funds.
Some analysts warn the impact of Pelosi’s visit will hasten the deterioration in US-China ties. The concern is that the trip and China’s reaction to it worsens the longer-term relationship on trade, and plays out in markets over weeks or more, with implications for Treasuries, according to BMO Capital Markets strategists Ian Lyngen and Benjamin Jeffery. Yields on the 10-year benchmark may well drop below 2.5% this week, they wrote in a report.
Pelosi became the highest-ranking American politician to visit Taiwan in 25 years, prompting China to announce military drills encircling the island. In a statement, she said her visit “in no way contradicts longstanding United States policy” and that America “continues to oppose unilateral efforts to change the status quo.”