TOKYO (BLOOMBERG) - Traders are bracing for US House Speaker Nancy Pelosi’s expected arrival in Taipei on Tuesday (Aug 2) to raise tensions with China, with Asian stocks sliding and global safe havens the yen and Treasuries rising.
Taiwan’s benchmark stock index fell as much as 2.1 per cent and Hong Kong’s Hang Seng Index plunged 2.62 per cent, while the Japanese currency touched a two-month high.
Mainland Chinese markets were also hammered, with the Shanghai Composite Index dropping 2.28 per cent and the Shenzhen Composite Index on China’s second exchange tumbling 2.82 per cent.
Japan’s Nikkei Index fell 1.44 per cent and South Korea’s Kospi index dropped 0.65 per cent.
Singapore’s Straits Times Index was down 0.2 per cent at 1.55pm local time.
Ten-year US Treasury yields dropped for a fifth day and approached 2.5 per cent, a level last seen in April. The Taiwan dollar hit its lowest since May 2020.
Mrs 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. Tuesday’s moves suggest traders are hedging against tension escalating, with analysts warning of the tail risk of a conflict between the world’s two largest economies that wreaks havoc on global markets.
“Some economic response against Taiwan is inevitable, otherwise the loss of face for China after all the threats would be unbearable,” said Mr Alvin Tan, head of Asia currency strategy at RBC Capital Markets in Hong Kong. “Risk appetite will remain cautious, with the greatest anxiety focused on Greater China markets, but beyond that, we would need to see the specific reaction from China.”
China regards Taiwan as part of its territory and has promised “grave consequences” for a visit by Mrs Pelosi, who would be the highest-ranking United States official to set foot on the island in 25 years. Taiwan is a critical supplier of semiconductors and other high-tech goods.
Some are warning that the consequences could ripple. The concern is that the trip and China’s reaction to it worsen the longer-term relationship on trade and play out in markets over weeks or more, with implications for Treasuries, according to BMO Capital Markets strategists Ian Lyngen and Benjamin Jeffery.
The White House had sought to dial back rising tensions, insisting there was no change in the US position towards the island and urging Beijing to refrain from an aggressive response. US National Security Council spokesman John Kirby outlined on Monday an analysis of the possible actions China could take, which include firing missiles into the Taiwan Strait and launching new military operations.
“The market needs to stay nimble on the risk of an accidental military conflict between the US and China,” said Mr Gao Qi, a currency strategist at Scotiabank in Singapore. “We keep a close eye on Pelosi’s trip and could see a spike in USD/CNH and USD/TWD.”
One-month risk reversals on the US dollar-Taiwan dollar - a gauge of expected direction over that timeframe - have jumped to the highest since May, signalling that traders are betting the island’s currency will weaken.
Still, despite the tensions, global risk markets have been relatively resilient. China’s offshore renminbi was little changed on Tuesday. S&P 500 futures retreated just 0.5 per cent.
The expectation is that China’s reaction will mostly be confined to some signalling actions, instead of something really hurting its economy, and “therefore at this stage, we view that the market’s reaction has so far been relatively mild”, Ms Becky Liu, head of China macro strategy at Standard Chartered Bank, told Bloomberg Radio. “We just need to be concerned about the medium- to long-term implications.”
Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest chipmaker, fell as much as 3.1 per cent. TSMC shares have fallen about 20 per cent this year, with Taiwan’s stock benchmark down about 19 per cent, slightly worse than the 17 per cent decline in the MSCI AC Asia Pacific index.
Mrs Pelosi may land in Taipei as soon as Tuesday, according to people familiar with the matter.
Her trip comes after a decades-long record of pushing back against China for its human rights record and growing global clout. As House Speaker, she is second in line of succession to the US presidency, making her visit to the democratically ruled island an affront to Beijing.
