(Bloomberg) — American stocks wavered as financial markets remained on edge amid heightened tensions between the US and China and fresh comments from a Federal Reserve official.
The S&P 500 struggled for direction as US House Speaker Nancy Pelosi landed in Taiwan on Tuesday evening in defiance of Chinese threats.
China views the island as its territory and had vowed an unspecified military response ahead of Pelosi’s visit. It now plans to conduct military drills and live-fire exercises this week in the waters and airspace encircling Taiwan.
Treasuries erased earlier gains with the 10-year yields turning higher after San Francisco Fed President Mary Daly said the central bank’s work on inflation is “nowhere near almost done.”
Risk assets have started August on the back foot after stocks posted the best month since 2020 in July.
The Fed remains in restrictive mode after raising rates three-quarters of a percentage point last week. Investors are watching for any hawkish comments from officials about the need for higher rates to restrain elevated inflation.
Corporate earnings continue to roll in, with higher prices threatening to erode margins.
“The Taiwan story fits into the broader risk-off theme,” said Mark McCormick, global head of FX strategy at TD Securities.
“It raises concerns about global growth issues, especially if geopolitical tensions and knock-effects exacerbate inflationary concerns. In turn, that forces central banks to keep fighting inflation in spite of the clear deceleration of global growth.”
Goldman Sachs Group Inc.
strategists led by Cecilia Mariotti said it was too soon for stock markets to fade the risks of a recession on expectations of a pivot in the Fed’s hawkish policy. JPMorgan Chase & Co. strategists, on the other hand, said the outlook for US stocks is improving for the second half of the year on attractive valuations.
Recent data showed that US job openings in June fell to a nine-month low, a sign of moderating demand for labor as economic pressures mount.
The job market has been a bright spot in an economy otherwise losing momentum and possibly heading toward a recession.
Pelosi’s trip is creating a fresh pressure point for investors already dealing with the prospects of a US recession, worldwide rate hikes and inflation that risks becoming entrenched as Russia’s war in Ukraine exacerbates food shortages.
“The Pelosi trip to Taiwan is getting most of the blame for this action once again, but the market is still seeing a relatively benign reaction to this trip,” wrote Matt Maley, chief market strategist at Miller Tabak + Co.
“Of course, if China overreacts with a highly belligerent response, the stock market — and other markets — will certainly react in a stronger fashion, but right now, most investors are looking at earnings, inflation and how inflation will impact the Fed over the next six to nine months.”
The prospect of a demand slowdown has sapped oil, leaving it around $94 a barrel.
Bitcoin fell while the dollar rose. The offshore yuan strengthened and non-deliverable forwards on the Taiwanese dollar indicated a weakening of the island’s currency.
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What to watch this week:
- Chicago Fed President Charles Evans, St. Louis Fed President James Bullard due to speak at separate events, Tuesday
- OPEC+ meeting on output, Wednesday
- US factory orders, durable goods, ISM services, Wednesday
- BOE rate decision, Thursday
- US initial jobless claims, trade, Thursday
- Cleveland Fed President Loretta Mester due to speak, Thursday
- US employment report for July, Friday
Some of the main moves in markets:
Stocks
- The S&P 500 was little changed as of 11:42 a.m.
New York time
- The Nasdaq 100 rose 0.2%
- The Dow Jones Industrial Average fell 0.4%
- The Stoxx Europe 600 fell 0.3%
- The MSCI World index rose 0.1%
Currencies
- The Bloomberg Dollar Spot Index rose 0.3%
- The euro fell 0.5% to $1.0207
- The British pound fell 0.2% to $1.2225
- The Japanese yen fell 0.3% to 131.99 per dollar
Bonds
- The yield on 10-year Treasuries advanced nine basis points to 2.66%
- Germany’s 10-year yield advanced one basis point to 0.79%
- Britain’s 10-year yield advanced three basis points to 1.84%
Commodities
- West Texas Intermediate crude rose 0.4% to $94.25 a barrel
- Gold futures rose 0.5% to $1,795.80 an ounce
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