Volatility hits markets with geopolitical factors in addition to a host of risks

(Bloomberg) — Global financial markets tumbled as risk sentiment continued to fray, as US House Speaker Nancy Pelosi’s trip to Taiwan added to a list of investor concerns ranging from restrictive Federal Reserve policy to the specter of an economic recession.

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In a session that saw several reversals, the S&P 500 finished lower after several attempts to stay in the green. The gauge of Chinese stocks listed in the US halted a three-day decline. US 10-year bond yields jumped to 2.75%, after an earlier drop that pushed them to around 2.5%. The Japanese yen and gold erased the gains. Advance offshore yuan.

“It’s going to be volatile,” said Elaine Gaskey, an economist at PGIM Fixed Income. Obviously, geopolitical risks are high on a more consistent basis here. So I think that lends a degree of volatility to the markets, and that’s on top of the volatility in the price markets that we’re already seeing because of the Fed’s move, and because it’s uncertain how far the Fed will actually have to go from here.”

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

Pelosi’s trip creates a new pressure point for investors already dealing with the prospects of a recession in the United States, higher interest rates around the world, and rising inflation. Analysts have warned of the risks of conflict between the two largest economies in the world wreaking havoc on global markets.

“China will show its discontent by escalating retaliatory measures, but it will not get out of hand given the weakness of its economy,” said Rajiv de Mello, global macro portfolio manager at Gama Asset Management in Geneva.

While the White House has sought to de-escalate rising tensions by insisting there is no change in its attitude toward Taiwan, which China considers part of its territory, Beijing has called Pelosi’s visit a “dangerous gamble” with dire consequences.

The Taiwan dollar hit its lowest level since May 2020, with the decline paring with signs that local banks are selling US currency to meet foreign money needs.

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

The US Depository Receipts of Taiwan Semiconductor Manufacturing Co. have fallen. and Baidu Inc. , while the Alibaba Group Holding Ltd. 2.5% gain.

Some analysts warn that the impact of Pelosi’s visit will accelerate the deterioration of US-China relations.

The concern is that the trip and China’s reaction to it is exacerbating the long-term relationship on trade, showing up in markets over weeks or more, with implications for Treasuries, according to BMO Capital Markets strategists Ian Lingen and Benjamin Jeffrey. They wrote in a report that yields in the 10-year index could fall below 2.5% this week.

“The expectation is that China’s reaction will mostly be limited to some pointing measures, rather than something that really hurts their economy, so at this point we see that the market reaction so far has been relatively moderate,” said Becky Liu, head of the China macroeconomic division. strategy at Standard Chartered Bank, according to Bloomberg Radio. “We just need to worry about the repercussions in the medium to long term.”

However, investors may need to prepare for a long-term reaction in financial markets, something that could support safe-haven assets such as Treasuries.

“Pelosi’s visit carries with it the assumption of a limited time frame for an interchangeable response. An assumption which we will describe as misplaced,” BMO Lingin and Jeffrey wrote in their memo. “Any response could be weeks or more away, which is why we expect the geopolitical background to once again contribute to the bullish underpinnings of the US interest rate market.”

(The market for updates is moving all the time. An earlier version of this story corrected the spelling of BMO Strategist Ian Lyngen.)

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