Why China-Taiwan tensions have risen to the forefront of financial market concerns

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It is an island off the coast of China, with an area comparable to that of Maryland and Delaware combined. Its population of over 23 million is 2 million larger than Florida’s. Often overlooked in global headlines, Taiwan is grabbing financial market attention as the biggest macro risk of the day, prompting many traders and investors to shun concerns about recession, inflation, central banks and the Russia’s war against Ukraine for now. The focus is on US President Nancy Pelosi’s visit to Taiwan, which has raised fears of reprisals from the island’s neighboring giant, China. Earlier on Tuesday, global equities sold off on geopolitical tension as investors rushed to the safety of US Treasuries and traders re-examined their asset positions. After Pelosi’s plane landed safely in Taiwan’s capital Taipei, the stock market appeared to improve, with the S&P 500 and Nasdaq Composite surging. FHN Financial’s executive vice president and interest rate strategist has reduced his equity allocations and is counting on commodity price floors, as well as fixed income price downside limits . “as an international growth engine is unreliable,” Vogel wrote in a note Tuesday. Moreover, China’s intentions towards Taiwan “have been obvious and threatening for years”, and the narrative between the two “will not go away for years”. is the highest-ranking US politician to visit the island of Taiwan in 25 years, when then-President Newt Gingrich arrived in 1997. Fears Chinese military planes ‘could buzz Pelosi’s plane’ said Greg Valliere, chief U.S. policy strategist for AGF Investments. Valliere described the potential for an error on either side as “pretty serious”. Chinese President Xi Jinping is seen by intelligence experts as in need of “entertainment” from his country’s struggling economy and trying to recover from “unusually harsh” COVID restrictions, according to Vallière. At the same time, the Chinese president “cannot afford to look weak” as he seeks a third term later this year. Meanwhile, Beijing sees Taiwan as a threat, given the island’s strong economy and individual freedoms. Taiwan is generally considered the most democratic place in East Asia. Pelosi’s visit will have a “major” impact – causing US-China relations to deteriorate further, “with little hope for trade reconciliation,” the AGF strategist said. Frenzied traders had been tracking every move of Pelosi’s plane on popular flight trackers, and it was flight-to-safety sentiment that drove bond yields lower earlier Tuesday, according to Ben Emons, managing director of the global macro strategy at Medley Global Advisors in New York. He described the bond market moves as the result of “Nancy Pelosi’s turmoil.” According to senior analyst Neil Thomas and others at Eurasia Group, a New York-based consultancy, “Pelosi’s visit will significantly increase US-China tensions, but is unlikely to produce a Chinese reaction. risking conflict.” Eurasia Group sees “a 25% chance of a major security crisis, such as a protracted military standoff between the United States and China that threatens further escalation,” they wrote in a rating. Still, Beijing could order additional military air and naval drills, could sanction the US delegation and freeze bilateral trade, and has the potential to consider boycotts and sanctions against Taiwan and US companies, the consultancy said. On Tuesday, major US stock indexes were mixed. in the late morning talks. Meanwhile, investors sold government bonds, pushing yields across the board higher in a reversal from Tuesday’s earlier bond rally.

– Vivien Lou Chen

 

(END) Dow Jones Newswire

08-02-22 1207ET

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