(Bloomberg) — Traders are bracing for US House Speaker Nancy Pelosi’s expected arrival in Taipei Tuesday to raise tensions with China, with Taiwan’s stocks sliding and global havens the yen and Treasuries rising.
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Taiwan’s benchmark stock index fell as much as 2.1%, 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 visit and the risk of an economic retaliation from China add pressure to Taiwan’s markets, with its stock markets already seeing the biggest outflow in Asia this year after China. China regards Taiwan as part of its territory and has promised “grave consequences” for a visit by Pelosi, who would be the highest-ranking US official to set foot on the island in 25 years.
“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 Hong Kong. “There is obviously near-term risk to the yuan and the Taiwan dollar from the Pelosi visit.”
Biden Team Tries to Blunt China Rage as Pelosi Heads for Taiwan
The White House had sought to dial back rising tensions, insisting there was no change in the US position towards the island and urging Beijing to refrain from an aggressive response. US National Security Council spokesman John Kirby outlined on Monday an analysis of the possible actions China could take, which include firing missiles into the Taiwan Strait and launching new military operations.
“The market needs to stay nimble on the risk of an accidental military conflict between the US and China,” said Qi Gao, a currency strategist at Scotiabank in Singapore. “We keep a close eye on Pelosi’s trip and could see a spike in USD/CNH and USD/TWD.”
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.
Still, despite the tensions, global risk markets have been relatively resilient. China’s offshore yuan weakened 0.1% Tuesday. S&P 500 futures retreated 0.5%.
Taiwan Semiconductor Manufacturing Co., the world’s largest chipmaker, saw its American Depositary Receipts fall 2.5% in US trading, while the Philadelphia Semiconductor Index rose 0.4%. TSMC shares have fallen 18% this year with Taiwan’s stock benchmark down about the same.
Why Markets Are Calm as Taiwan Tension Intensifies: China Today
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.
Pelosi’s Legacy as China Critic Fuels Beijing Ire on Taiwan Trip
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