Global stocks fell and government bonds rallied on Tuesday as US House of Representatives Speaker Nancy Pelosi’s expected visit to Taiwan raised the prospect of a forceful Chinese response.
Futures trading signalled Wall Street’s S&P 500 share index would fall 0.6 per cent at the New York open on Tuesday, with contracts tracking the tech-heavy Nasdaq 100 index 0.8 per cent lower.
In Europe, the regional Stoxx 600 share index fell 0.6 per cent and London’s FTSE 100 traded flat.
With Pelosi expected to land in Taiwan on Tuesday night and China ratcheting up its military activity, markets reacted to prospects of heightened US-China tensions and follow-on disruptions to global trade. Analysts warned that thin summer trading conditions could also exacerbate price moves in coming days if geopolitical tensions worsened.
“There is speculation, among other things, that the Chinese may make a military mark and/or impose some form of economic sanctions,” Seyran Naib, a strategist at SEB, commented in a note to clients.
Maarten Geerdink, head of European equities at NN Investment Partners, added, “as market liquidity tends to dry up over the summer, any reactions will be amplified”.
Chinese stocks had fallen heavily early in the session, with Hong Kong’s benchmark Hang Seng index dropping as much as 3.2 per cent, later trimming some of its losses. China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks dropped as much as 2.8 per cent. Taiwan’s Taiex and Japan’s Topix closed 1.6 per cent and 1.8 per cent lower respectively.
The yield on the 10-year US Treasury note dropped 0.05 percentage points to 2.55 per cent, near a four-month low, as the price of the global haven asset rose. The two-year Treasury yield traded at 2.85 per cent, forming a sharp inverted yield curve pattern, which has historically preceded recessions.
Germany’s 10-year Bund yield fell 0.06 percentage points to 0.71 per cent, also its lowest since early April.
“Geopolitics was already very much on people’s minds, given the Russia-Ukraine situation,” said Rosie Bullard, portfolio manager at James Hambro & Partners. “If we have more disruption to trade as a result of heightened tensions, markets will find that difficult and it could be a reason for another leg down in equities.”
The FTSE All-World index of global shares has fallen 15.6 per cent so far this year, dragged lower by Russia’s invasion of Ukraine and a surge in inflation driven by sanctions and trade disruptions that have propelled central banks to raise interest rates.
Japan’s yen climbed as much as 0.9 per cent to ¥130.39 against the dollar, its highest level in two months, reflecting haven buying.
More risk-sensitive currencies fell, with sterling 0.3 per cent lower at slightly more than $1.22 and the Australian dollar down 1.4 per cent to near 69 US cents.
Brent crude, the international oil benchmark, traded at about $100 a barrel, having not settled below this level since mid-July.