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The deeper market implications of Pelosi’s visit to Taiwan

The immediate impact on markets from Nancy Pelosi’s visit to Taiwan appears to be fading, but it’s leaving fund managers pondering how to approach the shaky relationship between the world’s two largest economies.

As Bloomberg notes, investors are trying to outline the long-term impact the US House Speaker’s trip will have on the market. From an accelerating US-China decoupling, creating a new pressure point on already fragile supply chains, to the possibility that Beijing could use the massive bull run on US bonds as a weapon.

“This is an issue that will have deeper implications than the markets will pay attention to,” Michael Avery, chief Asia analyst at Rabobank in Hong Kong, told Bloomberg. He notes that “geostrategic analysts largely agree that we are still alarmingly close to a fourth Taiwan Strait Crisis.”

Safe havens were lower today as concerns over the level of a military response from China eased and US bonds faced another sell off in the wake of hawkish comments yesterday from Federal Reserve officials. Stocks and futures struggled to find direction, while in China markets ended the day lower.

The deeper market implications of Pelosi's visit to Taiwan

Investors continued to look for clues on how China might react, beyond military drills and trade sanctions on Taiwan, while rising U.S. bond yields fueled talk of what Beijing might do with the almost 1 trillion dollars of US bonds it holds.

“Given the size of the sell off, it was only a matter of time before speculation began that China was using its large holdings of US Treasuries in retaliation for Pelosi’s visit,” noted Ian Lingen, strategist at BMO Capital Markets in New York.

According to him, however, “in the event that this happens, which we doubt, the downward trend would be limited as the short-term influences would be overshadowed by the negative impact on the global macroeconomic outlook.”

The amount of US debt held by China shows the extent to which the two economies are interconnected. However, their relationship has changed over the past six years following disagreements over trade, technology competition, security and the potential delisting of Chinese companies from Wall Street.

For his part, Xiangdong Bao, a fund manager at Edmond de Rothschild Asset Management in Paris, estimates that “the formal return of US influence in the Asia-Pacific region will inevitably accelerate the disengagement between the US and China”.

“As this is an evolving event, investors should prepare for a war of nerves that could mean intense volatility in the markets in the short term,” he adds.

Other analysts are thinking more long-term about how this week’s events could turn out to be a pivotal moment in the region’s history and potentially change the asstes distribution. After all, Taiwan is a critical global supplier of semiconductors and other high-tech products.

Huang Huiming, a fund manager at Nanjing Jing Heng Investment, points to the possibility of Beijing pursuing a “salami” tactic in Taiwan. To fuel fences within the country’s government over destabilization and how this could affect already extremely strained supply chains.

In the view of Jessica Amir of Saxo Capital Markets, when everything looks so uncertain usually the biggest trades involve buying the traditional investment havens, bonds and the dollar.

According to her, the recent tensions will further exhaust the nerves of investors, leading to an overperformance of investment havens.

“Right now we think the trend is set for equities for August and through the end of the year. Geopolitical tensions will increase and we also see a return to safe havens and the dollar, with increased buying,” he says.

Along the same lines, AMP Capital Markets chief economist Shane Oliver sees gains for US Treasuries versus gold, should friction intensify.

“It signals a further escalation of Cold War tensions between the West and China/Russia, which means higher premiums,” he reckons.

In Zurich, fund manager Gian C. Cortesi of GAM Investment sees parallels in the markets’ reaction to the 1997 trip by then-US House Speaker Newt Gingrich.

The Hang Seng and Taiwan’s stock market had then fallen ahead of the visit but recovered afterwards. This time, stocks in China, Hong Kong and Taiwan all moved lower ahead of Pelosi’s trip.

China’s military exercises near Taiwan “may keep investors on their toes,” he notes, but “market sentiment will pick up once they’re over.”

Source: Capital

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