TOKYO (BLOOMBERG) – Traders are bracing for US House Speaker Nancy Pelosi’s expected arrival in Taipei on Tuesday (Aug 2) to raise tensions with China, with Asian stocks sliding and global safe havens the yen and Treasuries rising.

Taiwan’s benchmark stock index fell as much as 2.1 per cent and Hong Kong’s Hang Seng Index plunged 3.14 per cent, while the Japanese currency touched a two-month high.

Mainland Chinese markets were also hammered, with the Shanghai Composite Index dropping 2.9 per cent and the Shenzhen Composite Index on China’s second exchange diving 3.77 per cent.

Japan’s Nikkei Index fell 1.59 per cent and South Korea’s Kospi index dropped 0.78 per cent.

Singapore’s Straits Times Index was down 0.1 per cent at 11.12am local time.

Ten-year US Treasury yields dropped for a fifth day and approached 2.5 per cent, a level last seen in April. The Taiwan dollar hit its lowest since May 2020.

Mrs 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 Mrs Pelosi, who would be the highest-ranking United States 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 Mr Alvin Tan, head of Asia currency strategy at RBC Capital Markets in Hong Kong. “There is obviously near-term risk to the renminbi and the Taiwan dollar from the Pelosi visit.”

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 Mr Gao Qi, 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 US dollar-Taiwan dollar – a gauge of expected direction over that timeframe – have jumped to the highest since May, signalling that traders are betting the island’s currency will weaken.

Still, despite the tensions, global risk markets have been relatively resilient. China’s offshore renminbi was little changed on Tuesday. S&P 500 futures retreated just 0.5 per cent.

Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest chipmaker, fell as much as 3.1 per cent, while the Philadelphia Semiconductor Index closed 0.4 per cent higher on Monday. TSMC shares have fallen about 20 per cent this year, with Taiwan’s stock benchmark down about 19 per cent.