It is an island off the coast of China, with a land area similar to Maryland and Delaware combined. Its population is about 1 million more than that of Florida.
Taiwan is catching the financial market attention as the biggest macro risk, prompting traders and investors to turn away from concerns about the economy, central banks and Russia's war on Ukraine, which are often overlooked in world headlines. The focus is on U.S. Speaker Nancy Pelosi's visit to Taiwan, which has sparked fears of retaliation from the island's giant neighbor China.
On Tuesday, global stocks sold off on geopolitical tension while investors scrambled to the safety of U.S. Treasurys and traders looked at their positions across assets. After Pelosi landed safely in Taipei, Taiwan's capital, market sentiment seemed to improve in the stock market, with the S&P 500 index and Nasdaq Composite going up.
Macro investors have been counting on China s reopening to stabilize positions, said Jim Vogel, a Memphis-based executive vice president and interest-rate strategist at FHN Financial. They have slashed allocations to equities and counted on floors for commodity prices, as well as limits on downside price action in fixed income.
In a note Tuesday, Vogel wrote that relying on China as an international growth driver is unreliable. China's intentions toward Taiwan have been obvious and threatening for years, and the narrative between the two will not go away for years. Pelosi is the highest-ranking American politician to visit the island of Taiwan in 25 years, when then-Speaker Newt Gingrich arrived in 1997.
Greg Valliere, chief U.S. policy strategist for AGF Investments, said on Tuesday that jitters first appeared in Asian markets, which were shaky Tuesday morning amid fears that China s military jets could buzz Pelosi's plane. Valliere described the potential mistakes made by either side as serious. Chinese President Xi Jinping is seen by intelligence experts as needing a diversion from his country's struggling economy and trying to recover from extremely harsh COVID restrictions, according to Valliere. China's president can't afford to look weak as he seeks a third term in office later this year.
Beijing sees Taiwan as a threat, given the island's healthy economy and personal freedoms. Taiwan is regarded as the most democratic place in East Asia. Pelosi's visit will have a major impact on relations between the U.S. and China, with little hope for a reconciliation on trade, the AGF strategist said.
According to Ben Emons, managing director of global macro strategy at Medley Global Advisors in New York, it was flight-to- safety sentiment that drove bond yields lower earlier on Tuesday, as traders followed every move of Pelosi's plane on popular flight trackers. He described the bond market moves as a result of Nancy Pelosi kerfuffle. Pelosi is unlikely to cause a Chinese reaction that risks conflicts, according to senior analyst Neil Thomas and others at Eurasia Group, a New York-based consulting firm. Eurasia Group believes that there is a 25% chance of a major security crisis, such as a prolonged U.S.-China military standoff that threatens further escalation, they wrote in a note. It is possible that Beijing could order additional military air and naval exercises, sanction the U.S. delegation and freeze bilateral exchanges, and may consider boycotts and sanctions on Taiwan and U.S. firms, according to the consultancy.
On Tuesday, major US stock indexes DJIA, SPX, COMP, were mixed in late morning trading. The investors sold off government bonds, sending yields higher across the board in a reversal of Tuesday's earlier bond rally.