Markets drop as tensions flare ahead of Pelosi visit to Taiwan
U.S. House Speaker Nancy Pelosi is expected to land in Taiwan at 10:20 a.m. ET, defying Chinese authorities who have warned of consequences if the trip takes place. The White House has sought to distance itself from the visit, saying it cannot control another branch of government, but it is yet another headache for the administration, which already faces a midnight court deadline to defend $350B of Trump-era tariffs on China. While the U.S. has emphasized the trip does not signal a change in its 'One China' policy, Beijing has warned that its militarily will "never sit idly by" and "whoever plays with fire will get burnt."
Backdrop: The last high-ranking U.S. official to visit Taiwan was then-speaker Newt Gingrich in 1997, which occurred in the aftermath of the Third Taiwan Strait Crisis and the island's first democratic presidential election in 1996. At the time, the Clinton administration responded to the Chinese military buildup in the Fujian province by sailing all of its most powerful weapons through the Strait of Taiwan and staging the biggest display of American military might in Asia since the Vietnam War. China backed down in response, but a lot has changed in recent decades with a more powerful Chinese military and a new zeal to "reunite" Taiwan with the mainland under President Xi Jinping.
Rising risk aversion prompted markets to slide in the Asia-Pacific on Tuesday, with some of the sharpest falls seen in Hong Kong (-2.5%), China (-2.3%) and Taiwan (-1.6%). U.S. stock index futures are also in the red, while the unease was most apparent in U.S. Treasuries as 10-year yields fell as much as 9 basis points to 2.51%. Taiwan Semiconductor Manufacturing (NYSE:TSM) - which is the island's flagship company and the world's largest manufacturer of semiconductor chips - will also be on the radar during the session as analysts debate the repercussions from Pelosi's visit.
Best case scenario: The saber-rattling continues and the armed responses are restricted to military flexing. Chinese warplanes could fly close to Taiwan's air defense identification zone, or naval activities could be conducted near the median line that divides the strait. Retaliatory measures could also be limited to the test-firing of missiles into the sea, while economic retaliation is on the table.
Worst case scenario: President Xi cannot afford to look weak amid slowing growth and a deflating property bubble, and it is indeed dangerous when autocrats feel that they are beginning to lose power. The People's Liberation Army could send warplanes over Taiwan, prompting the island to decide whether to shoot them down. America and its allies in the region would likely be drawn into the conflict militarily, sparking further global turmoil following the U.S. withdrawal from Afghanistan and Russia's invasion of Ukraine.
Related ETFs: iShares MSCI Taiwan ETF (NYSEARCA:EWT) and Franklin FTSE Taiwan ETF (NYSEARCA:FLTW).