Volatility hits markets with geopolitics adding a set of risks

(Bloomberg Opinion) — Global financial markets wobbled as risk sentiment remained fragile, with U.S. House Speaker Nancy Pelosi’s trip to Taiwan adding to the list of concerns. investors, ranging from a restrictive policy of the Federal Reserve to the specter of an economic recession.

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In a session of many reversals, the S&P 500 ended lower after several attempts to stay in the green. A gauge of US-traded Chinese stocks halted a three-day slide. Ten-year US yields rose to 2.75%, after an earlier drop that took them to around 2.5%. The Japanese yen and gold erased gains. The offshore yuan advanced.

“It’s going to be volatile,” said Ellen Gaske, an economist at PGIM Fixed Income. “Geopolitical risks obviously rise more persistently here. So I think that imparts a degree of volatility to the markets, and that’s on top of the volatility in the rate markets that we’re already seeing because the Fed is on the move, and because it’s not clear how far it’s going to have to go. really the Fed here.”

Pelosi’s trip prompts China’s battery giant to pause plant debut

Pelosi became the highest-ranking US politician to visit Taiwan in 25 years, prompting China to announce missile tests and military exercises around the island. She plans to hold a joint press conference with President Tsai Ing-wen at 10:53 am on Wednesday, Taiwan’s Foreign Ministry said in a statement.

Pelosi’s trip is creating a new pressure point for investors already facing the prospects of a US recession, rate hikes around the world and rising inflation. Analysts have warned of the tail risk of a conflict between the world’s two largest economies wreaking havoc on global markets.

“China will show its displeasure by stepping up retaliatory actions, but it will not get out of hand as its economy is weak,” said Rajeev De Mello, global macro portfolio manager at GAMA Asset Management in Geneva.

While the White House has tried to defuse rising tensions by insisting there is no change in its position on Taiwan, which China considers part of its territory, Beijing has called Pelosi’s visit a “dangerous gamble” with dire consequences.

The Taiwanese dollar hit its lowest level since May 2020, while paring its decline on signs that local banks were selling the dollar to meet the needs of foreign funds.

Stock markets in China and Hong Kong were the worst performers in Asia, as security analysts outlined possible military responses from Beijing.

US warehouse receipts for Taiwan Semiconductor Manufacturing Co. and Baidu Inc. fell, while those of Alibaba Group Holding Ltd. posted a 2.5% gain.

Some analysts warn that the impact of Pelosi’s visit will accelerate the deterioration of relations between the United States and China.

The concern is that China’s trip and reaction will worsen the long-term trading relationship and play out in markets for weeks or more, with implications for Treasuries, according to BMO Capital Markets strategists Ian Lyngen and Benjamin Jeffery. Yields on the benchmark 10-year index may fall below 2.5% this week, they wrote in a report.

“The expectation is that China’s reaction will be mostly limited to some signaling actions, rather than something that actually hurts its economy and so at this stage we see the market reaction so far has been relatively mild.” said Becky Liu, director of China Macroeconomics. strategy at Standard Chartered Bank Plc, he told Bloomberg Radio. “We only need to worry about the medium- and long-term implications.”

Still, investors may need to brace for a protracted reaction in financial markets, something that could support safe-haven assets like Treasuries.

“Pelosi’s visit carries with it the assumption of a limited time frame for a negotiable response; an assumption we will characterize as off the mark,” Lyngen and Jeffery of BMO wrote in their note. “Any response could take weeks or more and for this reason we anticipate that the geopolitical backdrop will once again contribute to bullish fundamentals for the US rate market.”

(Updates market movements at all times. An earlier version of this story corrected spelling by BMO strategist Ian Lyngen.)

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