Do not discount Taiwan risk just yet

There were some price action indications the recent equity market rally may be tiring, in the New Work session.

Apple displayed a classic and perfect one day reversal pattern often associated with major turning points. Could this be a warning for the market generally? Apple made new highs only to experience price rejection and to close on its low, back in the previous range.

The market is generally beginning to notice that actually the economy is not looking great, and companies like Walmart are battening down the hatches for tough times ahead.

While US Inflation Expectations were lower, they remain at frightening levels by historical standards. Actual inflation anywhere above 5%, currently 9.1%, can be catastrophic for any economy. At over 7%, there will only continue to be resolutely aggressive rate hikes from the Federal Reserve.

Then, just as investors began to relax regarding the recent scare with the Pelosi visit to Taiwan, China is again ratcheting up its military pressure there. Numerous warships continue to move close to Taiwan. Multiple warplane sorties across Taiwan’s economic boundary and warnings to civilian aircraft to stay out of large amounts of airspace around Taiwan, suggest this is not over yet.

It may even be the case, that China could begin to restrict shipping and air access to Taiwan through a virtual blockade, or simply severely diminishing access. Such on-going pressure of this kind, were it to become the new norm, would quickly degrade the Taiwanese economy and heat up the risk of actual exchange of fire and casualties between the two sides.

What we are all concerned with of course, is the risk of escalation to all out war and even invasion. This is not a probable scenario, but popular back home is the idea of making Taiwan pay a high price for the recent Pelosi visit.

Significant economic impact would fit with the more likely plan that eventually Taiwan itself will choose China rule. In the West, we do not see this as a likely outcome, but in China, it could very well be the main game long term.

For the people of Taiwan to feel the pressure of China in a very real way, in their every day livelihoods, could be something China would like to pursue at this time.

Any actual military conflict as a result, even if contained, would however send an immediate seismic shock to investors around the globe.

This is a risk that is immediately prevalent, and investors should continue to factor this into their current approach to markets.