Why the tensions between China and Taiwan came to the fore of financial market concerns

It is an island off the coast of China, with a land area comparable to Maryland and Delaware combined. The population is about 1 million higher than Florida’s.

Often overlooked in the headlines, Taiwan is drawing the attention of the financial market as the biggest macro risk of the day, leading many traders and investors to turn away from concerns about recession, inflation, central banks and Russia’s war on Ukraine. . The focus is on US President Nancy Pelosi’s visit to Taiwan, which has sparked fears of reprisals from the island’s gigantic neighbor China.

Earlier on Tuesday, global equities sold off on geopolitical tensions, as investors rushed to the safety of US Treasuries and traders took a second look at their asset positions. After Pelosi’s plane landed safely in Taiwan’s capital Taipei, market sentiment appeared to improve in the stock market, with the S&P 500 index and Nasdaq Composite rising higher.

“Macro investors have been counting on China’s reopening to stabilize their positions,” said Jim Vogel, an executive vice president in Memphis and interest rate strategist at FHN Financial. They have reduced the allocation to equities and have counted on commodity price bottoms, as well as limits for downward price action in fixed income.

Now, however, it is unreliable to rely on China “as an international growth engine,” Vogel wrote in a note on Tuesday. In addition, China’s intentions with Taiwan have been “clear and threatening for years,” and the story between the two “will not disappear for years.”

Pelosi is the most senior American politician to have visited the island of Taiwan in 25 years, when then-speaker Newt Gingrich arrived in 1997.

On Tuesday, jitters first emerged in Asian markets, which were “shaky” Tuesday morning amid fears that Chinese military planes could “buzz Pelosi’s plane,” said Greg Valliere, chief US policy strategist for Fresh Produce Investments. Valliere described the potential for a mistake from both sides as “pretty serious”.

Chinese President Xi Jinping is seen by intelligence experts as a “distraction” from his country’s struggling economy and attempts to recover from “exceptionally harsh” COVID restrictions, Valliere said. At the same time, China’s president “cannot afford to look weak” as he seeks a third term in office later this year.

Meanwhile, Beijing sees Taiwan as a threat, given the island’s healthy economy and personal freedoms. Taiwan is widely regarded as the most democratic place in East Asia. Pelosi’s visit will have a “big” impact – resulting in further deterioration of US-China relations, “with little hope of a trade reconciliation,” the fresh produce strategist said.

Hectic traders had been tracking every move of Pelosi’s plane on popular flight followers, and it was flight-to-safety sentiment that drove bond yields lower earlier on Tuesday, according to Ben Emons, general manager of global macro strategy at Medley Global Advisors in New York. York. He described the bond market movements as the result of “the Nancy Pelosi kerfuffle.”

According to senior analyst Neil Thomas and others at Eurasia Group, a New York-based consultancy, “Pelosi’s visit will significantly increase tensions between the US and China, but is unlikely to trigger a Chinese response that poses conflict risks.” .”

Eurasia Group sees “a 25% chance of a major security crisis, such as a protracted military standoff between the US and China that threatens further escalation,” they wrote in a note. Still, Beijing could order additional military air and naval exercises, impose sanctions on the US delegation and freeze bilateral exchanges, and has the potential to consider boycotts and sanctions against Taiwanese and US companies, the consultancy said.

On Tuesday, the major US stock indices DJIA,


were mixed in late morning trading. Meanwhile, investors sold government bonds, pushing yields higher across the board in a reversal from Tuesday’s earlier bond rally.

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