(Bloomberg) — Traders are bracing for US House Speaker Nancy Pelosi’s expected arrival in Taipei Tuesday to raise tensions with China, with Asian stocks sliding and global havens the yen and Treasuries climbing.
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Taiwan’s benchmark stock index fell as much as 2.1%, Hong Kong and Chinese shares slumped, while the Japanese currency touched a two-month high. Ten-year Treasury yields dropped for a fifth day and approached 2.5%, a level last seen in April. The Taiwan dollar hit its lowest since May 2020.
Pelosi’s trip risks creating a fresh pressure point for global investors given China regards Taiwan as part of its territory and has promised “grave consequences” for what would be the highest-ranking US official to set foot on the island in 25 years. Taiwan with its 23.5 million people is among Asia’s most vibrant democracies and has become a critical supplier of semiconductors and other high-tech goods.
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The White House sought to dial back rising tensions, insisting there was no change in the US position toward the island and urging Beijing to refrain from an aggressive response.
“Some economic response against Taiwan is inevitable, otherwise the loss of face for China after all the threats would be unbearable,” said Alvin Tan, head of Asia currency strategy at RBC Capital Markets in Singapore. “Risk appetite will remain cautious, with the greatest anxiety focused on Greater China markets, but beyond that, we would need to see the specific reaction from China.”
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US National Security Council spokesman John Kirby outlined on Monday an analysis of the possible actions China could take, including firing missiles into the Taiwan Strait, launching new military operations, crossing an unofficial no-fly zone between Taiwan and the mainland and making “spurious” legal claims about the strait.
One-month risk-reversals on the dollar-Taiwan dollar — a gauge of expected direction over that time frame — have jumped to the highest since May, signaling traders are betting the island’s currency will weaken.
Despite the tensions, global risk assets have been relatively resilient. China’s offshore yuan was little changed Tuesday. S&P 500 futures retreated just 0.4%.
“Expectation is that China’s reaction will mostly confined with some signaling actions, instead of something really hurting their economy, and therefore at this stage, we view the market’s reaction has so far been relatively mild,” Becky Liu, head of China macro strategy at Standard Chartered Bank Plc, told Bloomberg Radio. “We just need to be concerned about the medium-to long-term implications.”
Taiwan Semiconductor Manufacturing Co., the world’s largest chipmaker, fell as much as 3.1%, while the Philadelphia Semiconductor Index closed 0.4% higher Monday. TSMC shares have fallen about 20% this year with Taiwan’s stock benchmark down about 19%.
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Pelosi may land in Taipei as soon as Tuesday, according to people familiar with the matter. One person said a meeting with President Tsai Ing-wen is on Pelosi’s schedule for Wednesday, although another person said such a meeting is still in flux.
Her trip comes after a decades-long record of pushing back against China for its human-rights record and growing global clout. As House Speaker she’s second in line of succession to the US presidency, making her visit to the democratically-ruled island an affront to Beijing.
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Still, investors may need to prepare for a drawn out reaction in financial markets, something which could underpin haven assets like Treasuries.
“Pelosi’s visit carries with it the presumption of a limited timeframe for a tradable response; an assumption that we’ll characterize as misplaced,” BMO Capital Markets strategists Ian Lynge and Benjamin Jeffery wrote in a note. “Any response could be weeks away or further and for this reason we anticipate that the geopolitical backdrop will once again contribute to the bullish underpinnings for the US rates market.”
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