Geopolitical tensions took center stage on Wall Street Wednesday after U.S. presidential candidate Donald Trump expressed reservations about defending Taiwan, sending ripples through the financial markets. The chipmaking sector bore the brunt of the fallout, with shares of major players tumbling and investors seeking refuge in safer assets like gold.
Futures contracts tracking the U.S. S&P 500 equity benchmark dropped by 1% following a record high in the previous session. This downturn was largely driven by Trump's comments during an interview with Bloomberg Businessweek, where he suggested that Taiwan should pay the U.S. for its defense. Trump's remarks came as a shock to many, especially considering the delicate balance of power in the Taiwan Strait and the critical role Taiwan plays in global semiconductor supply chains.
Shares of Nvidia, a leading artificial intelligence chipmaker, fell 3.1% in pre-market trading. Meanwhile, Taiwan Semiconductor Manufacturing Co. (TSMC), the world's largest and most advanced chipmaker, saw its shares close 2.4% lower in Taiwan. The negative sentiment extended to European markets, with shares of ASML, a major supplier of chipmaking equipment, dropping as much as 7.7%.
"Many strategists have suggested Trump is bullish for equities, but I'm just not sure about that," said Benjamin Melman, global chief investment officer at Edmond de Rothschild Asset Management. "In terms of risk premium, today the market is adding a clearer reading."
The tech sector's mood soured further as Trump questioned U.S. support for Taiwan, likening it to an insurance policy for which Taiwan should pay. This stance marks a significant shift from the traditionally strong U.S. support for Taiwan, a democratic island that China claims as its territory. Trump's comments have raised concerns about the stability of global high-tech supply chains, which heavily rely on Taiwanese manufacturing.
The broader market reaction included a 1% drop in the dollar against the yen, reflecting fresh data from the Bank of Japan indicating heavy spending to prop up the currency. The yen traded at 156.4 per dollar, recovering from recent lows. In contrast, sterling touched a year-high of $1.3032 after British inflation data came in higher than expected, leading traders to reconsider the likelihood of a Bank of England rate cut in August.
Gold prices hit an all-time high of $2,473.29 per ounce as investors flocked to the safe-haven asset amid rising geopolitical risks and expectations of U.S. interest rate cuts. Commonwealth Bank of Australia commodity strategist Vivek Dhar noted that gold could surpass his target of $2,500 per ounce by the end of the year.
Federal Reserve Chair Jerome Powell recently expressed increased confidence that inflation is under control, reinforcing market expectations of a rate cut in September. This sentiment was echoed in the bond markets, with ten-year Treasury yields remaining steady at around 4.173%, near a four-month low.
Oil prices were relatively stable, with Brent crude futures edging up 0.2% to $83.94 per barrel and U.S. crude futures gaining 0.4% to $81.10. Meanwhile, Germany's 10-year bund yield, a benchmark for European debt markets, hovered near a three-week low at 2.42%.
Trump's remarks about Taiwan also highlighted the strategic importance of the semiconductor industry. Taiwan is expected to account for 66% of the world's production of advanced chips this year, a stark contrast to the U.S., which is projected to account for only 6%. This reliance on Taiwanese manufacturing has long been a point of concern for global supply chain stability.
TSMC Chair Mark Liu warned in 2022 that a Chinese invasion of Taiwan would render the company's factories inoperable, further emphasizing the risks associated with geopolitical instability in the region. Under the Biden administration, efforts have been made to bring more chip manufacturing back to the U.S., offering grants to companies like TSMC and Samsung to expand their production facilities domestically.
Trump's critical stance on Taiwan's semiconductor dominance underscores the complex dynamics of the global tech industry and the geopolitical challenges that accompany it. "They took almost 100% of our chip industry, I give them credit," Trump said. "We should have never let that happen."
