A look at the day ahead in markets from Anshuman Daga

Just as markets seemed to factor in a less hawkish Federal Reserve and relief for economies and businesses, politics is playing spoilsport.

Tensions have flared up with the U.S. House of Representatives Speaker Nancy Pelosi preparing to arrive in Taiwan on Tuesday, as part of her Asia tour.

The United States says it won’t be intimidated by Chinese threats to never “sit idly by” if Pelosi makes the trip to the self-ruled island claimed by Beijing.

The White House – which would not confirm the trip – said she had the right to go. But China has repeatedly warned against a visit by Pelosi.

The relationship between the world’s two biggest economies hasn’t been smooth and analysts see the visit by Pelosi, a long-time critic of China, as unsettling for markets.

Rising risk aversion has forced Chinese stocks to drop by the most in three months and the Taiwan dollar is at its lowest level in more than two years.

The nervousness is most evident in U.S. Treasuries, with yields on the 10-year Treasuries falling up to 9 basis points to 2.5160%, a four-month low, and retreating from an 11-year high of 3.4980% struck in mid-June.

The fragile market undertone follows weak economic data.

Surveys on Monday showed that factories across the United States, Europe and Asia struggled for momentum last month on sluggish global demand and China’s strict COVID-19 restrictions.

That sent oil prices to the lowest in two weeks while gold bulls pushed up prices of the yellow metal to four-week highs.

European stock futures indicated a weak start on Tuesday.

In Europe, German retail sales posted the biggest year-on-year slump since 1994 on Monday, with a 8.8% fall in real terms.

Down Under, investors were bit relieved after Australia’s central bank raised its cash rate by 50 basis points as expected but tempered guidance on further hikes ahead as it wrestles with rising inflation and a slowing economy.

Key developments that should provide more direction to markets on Tuesday:

Australia’s central bank raises rates:

Federal Reserve Bank of Chicago President Charles Evans talks on the economy and monetary policy

Major earnings: BP, Generali, DuPont, Caterpillar, Starbucks

(Reporting by Anshuman Daga; Editing by Vidya Ranganathan)

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