Stocks fluctuate due to tensions between China and the US

US stocks fluctuated as financial markets remained tight amid escalating tensions between the US and China and new comments from a Federal Reserve spokesman.

Speaker of the US House of Representatives Nancy Pelosi landed in Taiwan on Tuesday night despite Chinese threats. She is the first head of the US House of Representatives to visit Taiwan since 1997. China considers Taiwan its own territory and promised a tough response ahead of Pelosi’s visit.

Treasury bonds wiped out previous gains and 10-year bond yields rose after San Francisco Fed President Mary Daly said the central bank’s inflation work is not done.

Risk assets opened August in the red after equities performed well in July. The Fed has yet to take any action after raising rates by three-quarters of a percentage point last week. Traders are on the lookout for any hawkish comments from officials about the need to raise rates to curb inflation. Corporate earnings continue to rise, and higher prices threaten to squeeze margins.

Apply different trading strategies in a changing market and earn with Top Forex brokers

“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.”

Analysts believe that it is too early for stock markets to ease recession risks amid expectations of a reversal of the Fed’s hawkish policy. On the other hand, the prospects for US stocks in the second half of the year are improving due to attractive valuations, and the peak of investor aggressiveness is probably already passed.

Pelosi’s trip creates anxiety for traders who are already dealing with the prospect of a US recession, higher rates around the world, and inflation that risks taking hold as Russia’s war in Ukraine exacerbates food shortages.

The prospect of a slowdown in demand lowered oil prices, which traded below $94 a barrel. Bitcoin fell and the dollar rose. The offshore yuan strengthened to 6.7678 per dollar. Non-deliverable forwards on the Taiwanese dollar pointed to the weakening of the island’s currency.