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Global stock markets tumble, investors move towards bonds amid rising US-China tension, hawkish Fed comments

Stocks in Asia retreated Tuesday amid escalating US-China tension over Taiwan and deepening worries about a global economic slowdown, risks that are supporting demand for bonds as a haven.

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Investors are also keeping a wary eye out for more potentially hawkish comments from Federal Reserve officials about the need for higher interest rates to restrain elevated inflation. (Image: REUTERS)

Stocks in Asia retreated Tuesday amid escalating US-China tension over Taiwan and deepening worries about a global economic slowdown, risks that are supporting demand for bonds as a haven. Shares dropped in Japan, South Korea and Australia, while futures for Hong Kong earlier shed more than 1%. S&P 500 and Nasdaq 100 contracts declined after July’s global stock market rebound stumbled into August.

US House Speaker Nancy Pelosi is expected to visit Taiwan on Tuesday. She would become the highest-ranking American politician to visit the island in 25 years. China views Taiwan as its territory and has warned of consequences if the trip takes place.

The trip may end up being another “short-term dislocation” for markets but “it’s always concerning when they do happen,” Ayako Yoshioka, senior portfolio consultant at Wealth Enhancement Group, said on Bloomberg Radio.

The offshore yuan dipped and non-deliverable forwards on the Taiwanese dollar signaled a weakening of the island’s currency. A firm dollar gauge and gains in the yen hinted at a mood of caution.

Treasuries climbed, lowering the 10-year yield to about 2.54%. Bonds globally have pushed higher in the wake of data suggesting factory output is shrinking or cooling in key economies alongside moderating input prices. 

Investors are also keeping a wary eye out for more potentially hawkish comments from Federal Reserve officials about the need for higher interest rates to restrain elevated inflation. 

Expectations for how aggressive the Fed must be have receded because of recession risk, so any shift in those perceptions could stoke market volatility.

“You’re going to continue to see a lot of the Fed-speak continue to be fairly hawkish,” Larry Adam, chief investment officer at the private client group at Raymond James Financial Inc., said on Bloomberg Television. But he expects easing inflationary pressures to allow the Fed to be “a little bit more accommodative as we head into the back half of the year.”

The prospect of a demand slowdown has sapped oil, leaving it around $94 a barrel. Oilseed and grain futures fell after the first grain ship since Russia’s invasion left Ukraine, heralding some relief for a tight global food market.

In Australia, the central bank is poised to lift borrowing costs for a fourth month, portending an economic slowdown in a campaign to get price pressures under control. The nation’s shorter-maturity bond yields advanced.

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