(Bloomberg) — The immediate market shock of Nancy Pelosi’s visit to Taiwan may be fading, but it has left fund managers rethinking how to navigate fraying relations between the world’s two largest economies.
From an accelerated decoupling between the US and China, to an added pressure point for fragile supply chains, to speculation over whether Beijing might weaponize its vast holding of Treasuries, investors have been describing how the US president’s trip the US Chamber may have a long-term market impact.
Pelosi’s trip has once again highlighted the market risks stemming from intensifying competition between the US and China, and how that affects strategic investments in Chinese markets, global commodities and global markets. haven assets in case that relationship worsens.
“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 in Hong Kong. “However, geostrategists are largely united in the view that we are still worryingly close to a potential Fourth Taiwan Strait Crisis.”
Haven’s assets tumbled on Wednesday as concerns over the level of China’s military response dissipated and Treasuries sold off on aggressive comments from Federal Reserve officials. Most stocks and equity futures struggled for traction, although Chinese markets ended the day weaker.
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Investors continued to scan the headlines for clues as to how China might retaliate, beyond military exercises and some trade restrictions from Taiwan. Tuesday’s surge in Treasury yields sparked a debate about what the nation would do with its stack of nearly $1 trillion of US government bonds.
“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, a strategist at BMO Capital Markets in New York. . “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.”
The amount of US debt held by China shows how intertwined the two economies are. However, their relationship has changed in the last six years with disputes over trade, technological competition, security and the possible exclusion of Chinese companies in the US.
“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.”
Other analysts also charted a longer-term view of how this week’s events could become a pivotal moment in Asia-Pacific history and potentially alter asset allocation in the region. Taiwan is a leading global supplier of semiconductors and other high-tech products.
Huang Huiming, a fund manager at Nanjing Jing Heng Investment Management Co., points to the possibility of so-called “salami tactics” by Beijing, a piecemeal approach to divide and conquer an opposition, and how this can affect already drowned. up supply chains.
“Looking closely at the exercise zones, this is the closest to and around the island; all military operations at first are disguised as drills,” he 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.”
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When everything seems so uncertain, sometimes the most important operations include the purchase of traditional havens: Treasury bonds and the dollar.
That’s the view of Jessica Amir of Saxo Capital Markets, who says the latest stresses are only going to further fray investors’ nerves, fueling safer assets to outperform.
“Right now, we think the tone has been set for stocks for August and the rest of the year,” he said. “Geopolitical tensions will increase. We also see a return to safe havens, and the dollar will see an increase in purchases.”
His view is echoed by AMP Capital Markets Chief Economist Shane Oliver, who sees gains for Treasuries against gold if frictions continue to worsen. “Longer term, it indicates a further escalation in cold war tensions between the West and China/Russia, which means higher risk premiums,” he said.
In Zurich, fund manager Jian Shi Cortesi sees parallels in market performance between Newt Gingrich’s trip to Taiwan in 1997 and Pelosi’s this week. Back then, the Hang Seng Index and Taiwan stocks fell before the visits, but recovered afterwards. This time, stocks in China, Hong Kong and Taiwan fell ahead of Pelosi’s trip.
China’s military drills near 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.”
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