Equities 3 MIN READ

Stocks slide as rising US-China tensions trigger risk aversion

August 2, 2022By Reuters

Aug 2 (Reuters) – Emerging market stocks lost 1.1% on Tuesday as China’s warnings over a likely US visit to Taiwan raised worries about worsening Sino-US relations.

Sources said US House of Representatives Speaker Nancy Pelosi was expected to arrive in Taipei later on Tuesday, which Beijing said would undermine the relationship between China and the United States as it challenges Beijing’s self-claimed sovereignty over Taiwan.

The White House said Beijing’s responses could include firing missiles near Taiwan, large-scale air or naval activities, among others.

MSCI’s index of emerging market stocks was set for its worst session in three weeks, with Chinese blue-chips down 2%, while Taiwan’s main index slid 1.6% to a two-week low.

Shares of Apple (AAPL) supplier Taiwan Semiconductor Manufacturing Co. dropped 2.4%.

Most benchmark stock indexes in emerging Europe and Africa slid between 0.2% and 1%. Western European shares fell, as did US stock futures.

“The focus is going to shift on what sort of response China may make and it’s really difficult to price that in because we’ve had really strong rhetoric from China but no specific details in terms of what sort of response it may make,” said Piotr Matys, senior FX analyst at InTouch Capital Markets.

“So we are in a sort of wait-and-see mode at the moment.”

Global sentiment was already dour as weak factory activity data for July from China, Europe as well as the United States on Monday had heightened recession worries.

Michael Every, global strategist at Rabobank warned volatility would likely last far longer than this week with flows moving into safe haven currencies such as the dollar and yen.

MSCI’s index of developing world currencies was flat after a three-day rally.

“Asian currencies are more than likely going to be most vulnerable to risk aversion. To a less extent, central and eastern European currencies as they are not directly exposed (to Sino-U.S tensions),” said InTouch’s Matys.

But on the day, the Chinese yuan rebounded after hitting an 11-week low, while the Indian rupee extended gains to hit five-week highs.

“The price action indicates how difficult it is for investors to price in the risk.”

As the euro slipped, Hungary’s forint rallied 1.0%.

The rise in tension comes as the Biden administration debates whether to lift some tariffs on Chinese goods that were imposed under former President Donald Trump.

The tariff war that began in 2018 had slowed global growth and disrupted supply chains. Emerging market stocks fell almost 17% in 2018, while currencies dropped nearly 4%.

(Reporting by Susan Mathew in Bengaluru; Editing by Robert Birsel)

This article originally appeared on reuters.com

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