Stocks and US equity futures fell on Tuesday as US-China tensions over Taiwan escalated and concerns about a global economic slowdown grew, supporting demand for safe havens like Treasuries.
The Asian share index fell the most in three weeks, with the biggest drops in Hong Kong, China, and Taiwan. US and European futures were also down as the equity market rebound from July stumbled into August.
House Speaker Nancy Pelosi is scheduled to arrive in Taiwan on Tuesday, making her the highest-ranking American politician to visit in the last 25 years. China considers the island to be its territory and has vowed an unspecified military response to any visit by Pelosi.
The visit could result in another “short-term dislocation” for markets, but “it’s always concerning when they happen,” said Ayako Yoshioka, senior portfolio consultant at Wealth Enhancement Group, on Bloomberg Radio.
The offshore yuan recovered after falling on Monday, while Taiwan’s dollar fell. Gains in the yen indicated a cautious market mood.
Treasuries rose, bringing the 10-year yield down to around 2.55 %. Global bond prices have risen in response to data indicating that factory output is contracting or cooling in key economies, even as input prices have moderated. Widespread strains in US-China relations are exacerbating the geopolitical stress already affecting markets as a result of Russia’s war in Ukraine.
“All eyes will be on China’s military to see how they react if Pelosi does go to Taiwan,” said Edward Moya, senior market analyst for the Americas at Oanda.
Investors are also on the lookout for more potentially hawkish remarks from Federal Reserve officials about the need for higher interest rates to curb rising inflation.
Because of the risk of a recession, expectations for how aggressive the Fed must be have dwindled, so any shift in those perceptions could stoke market volatility.
The prospect of a slowdown in demand has depressed oil prices, which are now hovering around $94 per barrel. Oilseed and grain futures fell after the first grain ship since Russia’s invasion left Ukraine, bringing some relief to the world’s strained food supply.
In Australia, the central bank raised borrowing costs for the fourth month in a row, while emphasizing that it is not on a predetermined path to normalize rates and will be guided by incoming data. The country’s bonds rose while its currency fell.