Aug 2, 2022 - Economy & Business

Pelosi's Taiwan trip becomes (another) market headache

Binoculars with China flag in lenses

Illustration: Sarah Grillo/Axios

House Speaker Nancy Pelosi’s trip to Taiwan, and China’s bellicose response, has the potential to become another geopolitical flashpoint a jittery market doesn’t need.

Driving the news: Pelosi is the most senior U.S. lawmaker to visit Taiwan since 1997, when then-Speaker Newt Gingrich paid a visit to the island. Although rhetoric between the U.S. and China is getting heated, few expect the dispute to become a full-fledged crisis.

Why it matters: Wall Street began August by giving back some of July’s gains, when an improbable market rally carried benchmarks to their best month since November 2020.

  • Investors are trying to untangle a Gordian knot of uncertainty, including tighter monetary policy, inflation, recession and fallout from the Russia-Ukraine conflict. They hardly need another reason to be risk averse.

Context: Thus far, the war of words over Taiwan has exerted a marginal impact on asset prices. And as Schwab’s Chief Global Investment Strategist Jeff Kleintop points out, other U.S. lawmakers have visited the island over the last year, and Beijing routinely buzzes Taiwan’s airspace.

What they’re saying: “Analysts are divided on whether China has the capacity to pull off an invasion. But if it tried, whatever the outcome, this would likely result in asset freezes, and the severance of most economic and financial ties,” said Mark Wiliams, chief Asia economist at Capital Economics.

  • “If the US came to Taiwan’s aid, two superpowers would be at war,” he added.

What we’re watching: The U.S. dollar and Treasury bond prices, both of which have been buttressed by the Federal Reserve’s fight against inflation.

  • Ironically, safe-haven bids from nervous investors will cause both to rise anew, even as Wall Street has begun pricing in hopes that the weakening economy may cause the central bank to pull back on its rate hike campaign.
  • The greenback has been broadly bid against major currencies. But a strong yen — which recouped over five big figures from the dollar over the last few weeks — may become a proxy for rising Sino-American tensions.
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