Investors are outlining how US House Speaker Nancy Pelosi’s trip to Taiwan may have repercussions across global markets. These repercussions range from an accelerated decoupling of the world’s two largest economies to a discussion on whether or not China may weaponize its vast holdings of Treasuries.
Overnight, safe-haven assets experienced wild price swings as worries about the severity of China’s military reaction subsided and investors dumped Treasuries in response to hawkish statements made by Federal Reserve officials. After having its best four-day run since 2020, the value of the yen saw a dramatic reversal and fell by more than one percent, while benchmark yields in the United States rose by 18 basis points. The market continued to see selling pressure.
The possibility of a worldwide economic slowdown in the face of rising prices is already unsettling investors, and the presence of Representative Pelosi is adding more anxiety to their lives. The escalation of tensions between the United States and China threatens to erode already fragile mood, lending support to safe-haven currencies like the dollar and yen while putting downward pressure on equity markets.
The following is a sampling of the opinions expressed by analysts and strategists:
Treasury holdings and China
It was only a matter of time before speculation that China was using its significant Treasury holdings in retaliation for Pelosi’s visit, Ian Lyngen, a strategist with BMO Capital Markets, wrote in a note. “Given the magnitude of the selloff,” he said, “it was only a matter of time before speculation that China was doing so.” “In the event that this is the case (which we doubt), the bearishness should be limited as the near-term flow influences are overshadowed by the negative impact on the global macro outlook,” “In the event that this is the case (which we doubt), the bearishness should be limited as the near-term flow influences are overshadowed by
A more rapid uncoupling of forces
According to Xiadong Bao, a fund manager at Edmond de Rothschild Asset Management in Paris, “Short-term implication may be’sell the rumour, buy the news’ as the official response so far remains much more restrained versus what the market has feared.” Bao made this statement in light of the fact that the official response has so far remained much more restrained. “However, the implication in the middle and long terms can be even more substantial, which the market may be overlooking at the moment.” The resumption of US influence in the Asia-Pacific region will unquestionably hasten the process of decoupling between the US and China.
Unwinding Risk Premium
Tapas Strickland, director of economics and markets for National Australia Bank Ltd., wrote in a note that Pelosi’s trip to Taiwan “has seemed to proceed without too much geopolitical concern.” Pelosi is currently on a visit to Taiwan. A geopolitical risk premium was being factored in during the time leading up to the incident. This has started to turn around because to China’s forceful response, which is crucial to note because it is not a “unhinged” response. It’s possible that the unwinding of this premium contributed to the rise in yields as well.
The Reaction of China
According to Matt Maley, chief market strategist at Miller Tabak & Co., “it seems like investors in the United States do not anticipate that China would follow-through in their threats of retaliation to Speaker Pelosi’s visit to Taiwan,” which is an interesting observation. “Right now, the US markets are pricing in a considerably smaller response by China, but the Chinese markets are pricing in a much larger response by China. On the other hand, the Chinese markets should definitely see some good positive action as we continue through the month of August if China pulls back from its recent threats.
According to a note penned by Edward Moya, a senior market analyst at Oanda, “China’s response to Pelosi’s trip to Taiwan could have an impact on supply chains and demand, which could keep the inflationary pressures going strong.” Pelosi’s visit to Taiwan was in response to a call from Taiwanese President Tsai Ing-wen. There is a possibility that cryptocurrency prices may fall as a result of “tensions over House Speaker Pelosi’s visit to Taiwan perhaps weighing on risk appetite and that might drive cryptos lower.”
The Triumph of the Rational Mind
The goal of Pelosi’s visit, which is taking place against the backdrop of the situation in Ukraine, is to send a signal and have a preventative effect. According to Justin Tang, the head of Asian research at United First Partners, “the correlative Chinese sabre mongering has been the modus operandi and should come as no surprise.” In light of the current status of the Chinese economy, it is anticipated that “Rational thinking will triumph instead of weaponizing trade and regulations.” “Given the uncertain outlook on inflation, rates, and earnings, the trajectory for global asset classes will continue to snake sideways,”
Impact That Is Only Temporary
“Markets are already a little bit anxious, and it’s likely that losses will be incurred in Asia today. But if it’s nothing more than increased Chinese military drills and intrusions, then the short-term impact will be temporary at most, according to Shane Oliver, chief economist at AMP Capital Markets. “If it comes closer to actual conflict, then there will be a far higher impact in terms of share market declines with safe haven assets ($US, bonds, and gold benefitting), although this appears unlikely to happen.” In the longer run, it indicates an escalation in hostilities between the West and China and Russia, which results in higher risk premiums.
We have reason to believe that the Biden administration will not allow things to get out of hand and we are optimistic about this. According to Manish Bhargava, a fund manager at Straits Investment Holdings Pte in Singapore, “it is likely that they would enter into high level talks in an effort to alleviate the issue.” “What kind of retaliatory action China would take will determine a lot at this point. Although it is doubtful that China will get involved in a military confrontation, the possibility of an accident or a miscalculation happening is increasing. If diplomatic relations between the two nations continue to deteriorate, it might have a negative impact on manufacturing and supply chains, which would in turn fuel inflationary pressures.
It’s a snowball effect, according to Jessica Amir, a strategist at Saxo Capital Markets in Sydney. “As Fed speakers came out at the same time saying expect more rate hikes, it happened all at once,” she said. We believe that the tone for the equity markets for the month of August and the rest of the year has been established. There will be an increase in geopolitical tensions. Investors are bidding up the price of military equities or buying them up because they believe the situation could become even more dire. Additionally, we anticipate a flight to safe havens and a rise in demand for the US dollar.”
Regaining One’s Positive Attitude
Jian Shi Cortesi, a portfolio manager at GAM Investment Management in Zurich, said that despite the fact that China is conducting military drills close to Taiwan, investors should continue to remain vigilant. In my opinion, after the military drill is complete, there will be a recovery in the sentiment of the market.