Ripples from Pelosi’s trip may take time to impact global markets

(Bloomberg) — From an accelerated decoupling of the world’s two largest economies to a discussion about whether China could arm its vast holding of Treasuries, investors are describing how the House Speaker’s trip to Taiwan of the USA, Nancy Pelosi, could reverberate in global markets.

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Haven’s assets tumbled as concerns over the level of China’s military response faded and Treasuries sold off on aggressive comments from Federal Reserve officials. The yen underwent a sharp reversal, sinking more than 1% on Tuesday after its biggest four-day advance since 2020, but rose again on Wednesday. Most stocks and stock futures struggled for traction.

Pelosi’s visit has stoked new nerves among investors already spooked by the threat of a global slowdown amid rising inflation. Some strategists warned against writing off China’s initial response too soon (military exercises and some trade restrictions from Taiwan) with markets vulnerable to any signs of worsening Sino-US relations.

“This problem is going to go on far longer than the market’s attention span will allow,” said Michael Every, head of Asian financial market research at Rabobank. “However, geostrategists are largely united in the view that we are still worryingly close to a potential Fourth Taiwan Strait Crisis.”

China and Treasury Bonds

Investors were still scanning the headlines and market moves on Wednesday for clues as to how China might retaliate. The soaring rise in Treasury yields overnight sparked discussions about whether Beijing could piece together its stack of nearly $1 trillion of US government bonds. Chinese defense stocks rose, while China’s transportation and tourism stocks rose. Taiwan fell back.

Volatility hits markets with geopolitics adding a set of risks

“Given the magnitude of the sell-off, it was only a matter of time before there was speculation that China was using its significant Treasury holdings in retaliation for Pelosi’s visit,” said Ian Lyngen, strategist at BMO Capital Markets. “Should this be the case (which we doubt), the downside should be limited as short-term flow influences are overshadowed by the negative impact on the global macro outlook.”

Others, like Huang Huiming, a fund manager at Nanjing Jing Heng Investment Management Co., are bracing for the start of Beijing’s “salami tactics,” a piecemeal approach to dividing and conquering an opposition, and how this could impact already. choked up supply chains.

“Looking closely at the exercise zones, this is the closest to and around the island; At first, all military operations are disguised as drills,” Huang said. “We might worry if the drills get longer and more intense to affect supply chains, but there’s no sign of that happening now.”

Pelosi to meet Taiwan leader as China launches military exercises

faster decoupling

While some investors are looking to sell the rumor, buy the news for now about Pelosi’s visit, others are charting a longer-term macro view of how this could become a pivotal moment in Asia-Pacific history and potentially alter the asset allocation. in the region. Taiwan is a leading global supplier of semiconductors and other high-tech products.

There are risks of a long-term economic decoupling between the world’s two largest economies with a host of potential shocks, including new stress on supply chains that worsens inflation. Beijing has already announced the start of an economic response, halting exports of natural sand to Taiwan and halting imports of fruit and fish.

“The official return of US influence in Asia-Pacific will inevitably accelerate the decoupling between the US and China,” said Xiadong Bao, a fund manager at Edmond de Rothschild Asset Management in Paris. “As this is an evolving event, investors should prepare for a test of nerves that may involve high market volatility in the short term.”

caution prevails

When everything seems so uncertain, sometimes the most important transactions include buying the world’s traditional safe havens: Treasuries and the dollar.

That’s the view of Jessica Amir of Saxo Capital Markets, who believes the latest stresses are only going to further fray investors’ nerves, fueling safer assets to outperform.

“At this point, we believe the tone has been set for stocks for August and the rest of the year. Geopolitical tensions will rise,” Amir said. “We also see a return to safe havens, and the dollar will see increased buying.”

It’s a view shared by AMP Capital Markets chief economist Shane Oliver, who sees gains for Treasuries against gold should the visit spark a real conflict. “Longer term, it indicates a further escalation in cold war tensions between the West and China/Russia, which means higher risk premiums,” he said.

feeling to recover

In Zurich, fund manager Jian Shi Cortesi sees parallels in market performance between Newt Gingrich’s trip to Taiwan in 1997 and Pelosi’s today. Back then, the Hang Seng Index and the Taiwan stock fell before the visits, but rebounded strongly afterwards. This time, investors saw similar weakness in Chinese, Hong Kong and Taiwan stocks ahead of Pelosi’s trip.

China’s military drills near the island of Taiwan “may still keep investors on their toes,” the chief investment officer at GAM Investment Management said. “Market confidence will recover once the military exercise ends.”

(Updates throughout.)

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