Global stocks fell and government bonds rallied on Tuesday as the expected visit of US House Speaker Nancy Pelosi to Taiwan raised the prospect of a strong response from China.
Hong Kong’s benchmark Hang Seng index fell as much as 3.2 percent on Tuesday, then pared some of its losses. China’s CSI 300 index of shares traded in Shanghai and Shenzhen fell as much as 2.8 percent. Taiwan’s Taiex and Japan’s Topix closed down 1.6% and 1.8%, respectively.
In Europe, the regional Stoxx 600 share index fell 0.6% and London’s FTSE 100 was flat, with analysts warning of sharper price moves in the coming days if geopolitical tensions worsen .
“As market liquidity tends to dry up over the summer, any reaction will be amplified,” said Maarten Geerdink, head of European equities at NN Investment Partners.
Futures trading indicated Wall Street’s S&P 500 was down 0.7% in early New York trading on Tuesday, with contracts trailing the Nasdaq 100 technology index up 0.8% down
The moves came as Pelosi prepared to meet with Taiwanese President Tsai Ing-wen and China stepped up its military activity in Taiwan, with rising tensions between the United States and China raising the possibility of disruptions to world trade.
“There is speculation, among other things, that the Chinese may make a military mark and/or impose some sort of economic sanctions,” SEB strategist Seyran Naib said in a note to clients.
The yield on the 10-year U.S. Treasury note fell 0.06 percentage points to 2.55 percent, near a four-month low, as the price of the benchmark debt instrument rose . The two-year Treasury yield traded at 2.85 percent, 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%, also its lowest level since early April.
“Geopolitics was already very much on people’s minds, given the situation between Russia and Ukraine,” said Rosie Bullard, portfolio manager at James Hambro & Partners. “If we have more disruptions to trade as a result of heightened tensions, markets will find it difficult and could be a reason for another move lower in stocks.”
The FTSE All-World index of global shares has fallen 15.6% so far this year, dragged down by Russia’s invasion of Ukraine and a rise in inflation fueled by sanctions and disruptions trade that have pushed central banks to raise interest rates.
The Japanese yen rose as much as 0.9% to 130.39 yen against the dollar, its highest level in two months, reflecting shelter buying.
The most risk-sensitive currencies fell, with sterling down 0.5% to just under $1.22 and the Australian dollar down 1.4% to 69 US cents.
Brent crude, the international oil benchmark, fell 0.9% to $99.14 a barrel, not closing below $100 since mid-July.
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