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

Stocks in Asia fell on Tuesday amid escalating US-China tensions over Taiwan and growing concerns about a global economic slowdown, risks that are supporting demand for safe-haven bonds. Stocks fell in Japan, South Korea and Australia, while Hong Kong futures previously lost more than 1%. The S&P 500 and Nasdaq 100 contracts fell after July’s global stock market rebound stumbled in August.

Speaker of the United States House of Representatives 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 considers Taiwan its territory and has warned of consequences if the trip goes ahead.

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

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The offshore yuan fell and non-deliverable Taiwanese dollar futures signaled a weakening in the island’s currency. A firm dollar gauge and yen gains suggested a climate of caution.

Treasuries rose, lowering the 10-year yield to around 2.54%. Bonds globally rose on data suggesting factory output is contracting or cooling in key economies alongside moderating input prices.

Investors are also keeping a close eye on more potentially hawkish comments from Federal Reserve officials about the need for higher interest rates to contain high inflation.

Expectations of the Fed’s aggressiveness have receded on recession risk, so any change in those perceptions could fuel market volatility.

“You’re going to continue to see a lot of the Fed rhetoric continue to be quite hawkish,” Larry Adam, chief investment officer of Raymond James Financial Inc.’s private client group, told Bloomberg Television. But he expects easing inflationary pressures to allow the Fed to be “a bit more dovish as we head into the second half of the year.”

The prospect of slowing demand undermined oil, leaving it around $94 a barrel. Oilseed and grain futures prices fell after the first grain ship since the Russian invasion left Ukraine, heralding some relief for a tight global food market.

In Australia, the central bank is set to raise borrowing costs for a fourth month, hinting at an economic slowdown in a campaign to rein in price pressures. The country’s shorter-dated bond yields rose.