Dow futures drop as tensions intensify over Pelosi’s planned Taiwan visit

What’s driving the market

Global equity markets fell as local news reports said Pelosi was set to arrive in Taiwan Tuesday night local time. Beijing, which sees Taiwan as part of its territory, has threatened “serious consequences” if Pelosi’s visit goes ahead as planned.

“The events schedule is dominated by one question: will U.S. House Speaker Pelosi arrive in Taiwan today as has been flagged, and how will China respond?” wrote Marc Ostwald, chief economist and global strategist at ADM Investor Services International, in a note.

Pelosi would be the highest-ranking elected U.S. official to visit the island in 25 years and comes as part of a swing taking the speaker to Singapore, Malaysia, South Korea and Japan for talks on a variety of topics, including trade, COVID-19, climate change and security.

“The U.S. and Taiwan have colluded to make provocations first, and China has only been compelled to act out of self-defense,” Chinese Foreign Ministry spokesperson Hua Chunying told reporters Tuesday in Beijing.

Read: Pelosi leaves Malaysia, tensions rise over Taiwan visit

The White House on Monday criticized Beijing’s response, saying the U.S. “will not take the bait or engage in saber-rattling” and has no interest in increasing tensions with China.

“The most likely outcome is that Pelosi visits Taiwan, there’s some show of force by the Chinese military (like crossing the midpoint of the Taiwan Strait), escalated rhetoric, but no actual conflict,” said Tom Essaye, founder of Sevens Report Research, in a note.

“This outcome won’t derail the rally (as it’s being driven by Fed anticipation). But this is a market that does not need additional headwinds, and escalation in tensions between the U.S. and China will only serve as an additional headwind on stocks—something that won’t reverse the rally but could pile on if the outlook turns less rosy,” he wrote.

The tensions sparked demand for safe-haven assets, with the yield on the 10-year Treasury note
TMUBMUSD10Y,
2.541%
down more than 5 basis points at 2.556%. Yields and debt prices move opposite each other.

U.S. stocks rose sharply in July, bouncing back from 2022 lows set in June. Stocks fell into a bear market this year as the Federal Reserve has aggressively raised interest rates in an effort to curb inflation that continues to run at its hottest in around four decades.

See: JP Morgan quant who called summer rebound in stocks says rally could continue even if corporate profits decline

The sharp tightening has stirred recession fears, though stocks have found support on ideas prospects of a slowdown will lead the Fed to slow the pace of rate increases or begin cutting rates in 2023—a prospect that many economists and analysts see as dubious.

Read: Did the stock market peer through ‘rose-colored glasses’ as tech surged in July?

Investors were also preparing for another busy day of earnings, which have so far come in better than feared.

Data on U.S. June job opening and labor turnover were slated for 10 a.m. Eastern. Figures on auto sales from major auto makers were expected throughout the day.

Companies in focus

• Shares of Uber Technologies Inc.
  UBER,
  +4.90%
  surged 14% in premarket trade after the ride-hailing and delivery services company swung to a second-quarter loss but reported a more than doubling in revenue that beat expectations by a wide margin and became cash-flow positive for the first time.

• Caterpillar Inc.
  CAT,
  -1.71%
  shares fell 2% after the construction and mining equipment maker reported second-quarter profit that beat expectations but sales that came up short, as higher pricing and sales volume were partially offset by unfavorable currency impacts.

• JetBlue Airways Corp. 
  JBLU,
  +2.02%
  fell in premarket trading Tuesday after the airline reported a larger loss than analysts had been expecting. 

• TD Bank Group
  TD,
  -0.69%
  said Tuesday it would buy investment bank Cowen Inc.
  COWN,
  +1.20%
  for $1.3 billion, or $39 a share, a premium of about 10% over its closing price of $35.49 a share on Monday and a purchase price multiple of 8.1 times Cowen’s estimated 2023 earnings. Cowen shares rose 6.8%, while TD shares edged up 0.3%.

• Pinterest Inc.
  PINS,
  +2.62%
  late Monday missed expectations for earnings and guided for revenue lower than analysts expected in the current quarter, but shares were rallying as users stuck around and activist investor Elliott Management Corp. confirmed a previously reported investment in the company. Pinterest shares rose 18%.

Other assets

• The ICE U.S. Dollar Index
  DXY,
  +0.24%,
  a measure of the currency against a basket of six major rivals, was up 0.1%.

• The U.S. oil benchmark
  CL.1,
  +0.37%
  was flat near $93.94 a barrel, while gold futures
  GC00,
  +0.87%
  rose 0.5% to $1,796.10 an ounce.

• Bitcoin
  BTCUSD,
  -1.13%
  slumped 1.9% to trade near $22,850.

• The Stoxx Europe 600
  SXXP,
  -0.47%
  fell 0.6%, while London’s FTSE 100
  UKX,
  +0.02%
  was fractionally lower.

• China’s benchmark Shanghai Composite
  SHCOMP,
  -2.26%
  ended 2.3% lower, while the Hang Seng Index
  HSI,
  -2.36%
  shed 2.4% in Hong Kong and Japan’s Nikkei 225
  NIK,
  -1.42%
  declined 1.4%.