China’s Shanghai Composite stock index fell 2.3 percent during Tuesday’s session and Hang Seng, the main index of the Hong Kong stock exchange, fell 2.4 percent. During the session, they even dropped by 3 percent. Taiwan’s Taiex lost 1.6 percent on Tuesday and Japan’s Nikkei 225 lost 1.4 percent. This sell-off was directly related to rising geopolitical tensions. These concerns are accompanied by the visit of Nancy Pelosi, the Speaker of the United States House of Representatives, to the countries of Asia. One of the points of her journey may be Taiwan, which Beijing considers provocations. A warning to Pelosi before visiting Taipei was issued by the Chinese People’s Liberation Army. On the other hand, the armed forces of the Republic of China (Taiwan) withdrew the passes for some soldiers.
Fears of armed incidents in Asia have also spoiled sentiment in European equity markets. However, the sell-off on the stock exchanges of the Old Continent was quite moderate on Tuesday afternoon. Most European indices then lost less than 1 percent.
“Pelosi’s visit will significantly increase tensions between the US and China, but is unlikely to provoke a Chinese response that poses the risk of conflict,” analysts from the Eurasia Group write.
“China will show its displeasure at retaliation, but this should not get out of hand as the Chinese economy is currently weak,” said Rajeev de Mello, fund manager at Swiss GAMA Asset Management.
However, some analysts say Pelosi’s visit could have negative effects on markets in the long term, as it significantly reduces the likelihood of a ceasefire in the US-China trade war. On the other hand, geopolitical tensions in Asia are becoming an additional risk factor at a time when many such factors are already weighing on global markets.
“Investors are in no way willing to buy risky assets at a time when we have such a flash point,” said Neil Campling, an analyst at Mirabaud Securities.
The past few weeks have been pretty good for the US stock markets. The Nasdaq Composite Index gained 16% from the June bottom to Monday’s closing, and the S&P 500 rose 12% from the bottom. July was the best month for them until November 2020. However, analysts are reminding that August and September have often been bad months for US stock markets historically. The S&P 500 has lost an average of 0.6 percent over the past 25 years in these months, respectively. and 0.7 percent
Of course, the behavior of the markets will depend on many factors, including data from the economy and expectations about the Fed’s monetary policy.
– Will the rises in the markets continue? They need confirmation. Currently, the macroeconomic environment can throw markets in all directions. Wall Street has focused very much on the risk of a recession and the story has now shifted to hoping inflation is at its peak. Investors need more economic data to confirm what they are valuing in the markets, said Yung-Yu Ma, chief investment strategist at BMO Wealth Management.
Goldman Sachs analysts say investors may have gotten used to the risk of a recession too quickly. According to them, it has not yet been fully priced in by the American and European markets. They also see the risk of aggressive surprises from central banks if inflation continues to rise.
There are also voices of optimists among analysts. – While the outlook for economic activity remains challenging, we believe equity risk rewards will become more attractive in the second half of the year, said Marko Kolanovic, strategist at JPMorgan Chase. He points out that poor economic data could be interpreted by investors as arguments for a less aggressive monetary policy. The market can play to highs through inflation, interest rates and bond yields.
Analysts’ calculations at Bank of America (based on stock market data from 1928) show that if the S&P 500 rises at least 5% in July, it will rise by an average of 2% in August and 0.7% in September.