[New York Stock Market] Dow Falls 1.23% on Pelosi-Induced US-China Tensions and Fed Remarks...

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] The U.S. New York stock market closed lower across the board on the 2nd (local time) as political tensions between the U.S. and China escalated over House Speaker Nancy Pelosi's visit to Taiwan. A series of remarks by Federal Reserve Bank presidents regarding the future Fed tightening path also caused market fluctuations.

On this day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 32,396.17, down 402.23 points (1.23%) from the previous session. The large-cap focused S&P 500 index ended at 4,091.19, down 27.44 points (0.67%), and the tech-heavy Nasdaq index closed at 12,348.76, down 20.22 points (0.16%).

By sector, all sectors of the S&P 500 showed declines, but there were mixed results based on earnings. Uber, the largest ride-hailing service provider in the U.S., posted second-quarter sales exceeding market expectations and closed up 18.90% from the previous session. Pinterest, which announced earnings after the previous day's close, rose more than 11% despite below-expectation net income, as its user numbers were evaluated positively.

Caterpillar fell 5.82% due to earnings below expectations. DuPont slid 2.71% amid a negative outlook for third-quarter earnings. AMD, which is scheduled to announce earnings after the market close, rose 2.59%. Tesla closed up 1.11% after Citigroup raised its target price.

Investors focused on the political tensions between the U.S. and China heightened by Pelosi's visit to Taiwan, remarks from Federal Reserve officials on the interest rate path, economic indicators, and corporate earnings.

Despite strong opposition from China, Speaker Pelosi proceeded with her visit and upon arriving at Taipei Songshan Airport on the night of the 2nd, she stated, "At a time when the world faces a choice between dictatorship and democracy, the United States' solidarity with the 23 million people of Taiwan is more important today than ever." This was interpreted as emphasizing that her visit to Taiwan was in defense of U.S. democracy.

On the 3rd, Speaker Pelosi is scheduled to meet and have lunch with Taiwan President Tsai Ing-wen. Afterwards, she will visit the Legislative Yuan (parliament) and the Human Rights Museum, meet with Chinese dissidents, and is expected to depart around 4 to 5 p.m. This is the first visit by a U.S. House Speaker to Taiwan in 25 years since Newt Gingrich in 1997.

In response, China immediately announced large-scale military demonstrations encircling Taiwan, escalating tensions in the Taiwan Strait to the highest level. China's Ministry of Foreign Affairs warned in a statement broadcast on China Central Television (CCTV) immediately after Pelosi's arrival in Taiwan that "all consequences arising from this must be borne by the United States and Taiwan independence separatist forces." The spokesperson for the People's Liberation Army Eastern Theater Command, Sui, announced that from the night of the 2nd, joint naval and air exercises will be conducted in the northern, southwestern, and southeastern waters and airspace of Taiwan, along with long-range live-fire artillery drills in the Taiwan Strait.

The U.S. White House also confirmed that Pelosi's visit to Taiwan did not violate China's sovereignty and stated it would not be intimidated by any threats. John Kirby, White House National Security Council (NSC) Coordinator for Strategic Communications, told reporters that Pelosi's visit is "100% consistent with the U.S. 'One China' policy" and that "the U.S. will not be intimidated by threats stemming from aggressive rhetoric."

Investors also paid close attention to remarks from Fed officials regarding interest rate hikes. Loretta Mester, President of the Cleveland Federal Reserve Bank, said that stronger evidence of easing inflation is needed and that "there is more work to do," indicating a continued stance on additional rate hikes. On the same day, Mary Daly, President of the San Francisco Fed, warned in an interview with CNBC that "our work is not done yet" and that the market should not interpret the Fed's consecutive giant steps (0.75 percentage point rate hikes) as a signal to reduce the size of rate increases soon. She predicted the Fed would keep rates high for some time after hikes.

Charles Evans, President of the Chicago Fed, said the Fed will continue raising rates until inflation slows but hopes to slow the pace of hikes within the year. He expects the Fed to raise rates by 0.5 percentage points at the September Federal Open Market Committee (FOMC) meeting after two consecutive giant steps. However, if conditions do not improve, a 0.75 percentage point hike remains possible. He added that he hopes for 0.25 percentage point hikes at the remaining FOMC meetings in November and December this year and into early 2023. Both Evans and Daly do not have voting rights this year.

According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds (FF) futures market currently prices in over a 60% chance of a 0.5 percentage point hike in September. The probability of a 0.75 percentage point hike is 39.5%.

In the New York bond market on this day, the 10-year Treasury yield rose to around 2.76% as Fed officials' remarks were digested. The 2-year yield, sensitive to monetary policy, surpassed 3% again. The inversion phenomenon, where short-term yields exceed long-term yields, continues. Such an inversion is generally considered a precursor to a recession.

Economic indicators were weak. According to the June Job Openings and Labor Turnover Survey (JOLTS) released by the U.S. Department of Labor, job openings in U.S. companies in June were 10.7 million, down 605,000 (5.4%) from the previous month. This marks a decline for three consecutive months and is the lowest level since September last year.

Corporate earnings announcements continue. After the market close on this day, Starbucks, Airbnb, AMD, and PayPal are scheduled to report earnings.

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as Wall Street's "fear gauge," rose about 5% from the previous session and is trading around the 23-24 range. Gold prices slightly declined as the dollar strengthened amid recession concerns and U.S.-China tensions.

Oil prices rose slightly ahead of the Organization of the Petroleum Exporting Countries Plus (OPEC+) producers' meeting. On the New York Mercantile Exchange, September West Texas Intermediate (WTI) crude oil closed at $94.42 per barrel, up 53 cents (0.56%) from the previous session.

This content was produced with the assistance of AI translation services.