Portugal Colonial - Markets sink as talk of Pelosi Taiwan trip fans China-US tension

Traders were already skittish after a string of data showed economies beginning to take a hit from surging inflation and central bank interest rate hikes aimed at taming prices.

A possible meeting between Pelosi and Taiwanese President Tsai Ing-wen is sure to anger Beijing, which views the island as its territory and has said the White House was playing "with fire".

While observers do not think the move will spark a conflict, US officials said China was preparing possible military provocations that could include firing missiles in the Taiwan Strait or "large-scale" incursions into Taiwan's airspace.

White House National Security Council spokesman John Kirby told reporters there was "no reason for Beijing to turn a potential visit consistent with longstanding US policies into some sort of crisis".

Still, the spike in tensions between the world's two superpowers has sent shivers through trading floors, compounding worries that Russia's invasion of Ukraine could escalate into a wider war.

Reports of the visit hit US stocks, with all three main indexes reversing an early rally to end in negative territory.

And Asia followed suit.

Hong Kong and Shanghai led losses, shedding around three percent, while Taipei was off about 1.8 percent. Tokyo was more than one percent lower, while Sydney, Seoul, Singapore, Wellington and Jakarta were also well down.

And on currency markets, the safe-haven yen jumped to a two-month high against the dollar, and the Taiwan dollar dropped 0.7 percent.

"Risk is mounting," said Stephen Innes of SPI Asset Management.

"As Pelosi is almost sure to visit Taiwan on Tuesday, now it is in China's hands to see if the situation escalates," he said, adding that while "it could be little more than a tempest in a teapot still, international and Taiwan investors are pretty concerned".

"No party wants a real war, but the risk of mishap or even aggressive war game escalation is real, which could always lead to a tactical mistake."

The flare-up in tensions comes less than a week after Biden and Xi Jinping held phone talks during which the Chinese president warned the United States not to "play with fire" regarding the island.

However, Ayako Yoshioka, at Wealth Enhancement Group, told Bloomberg Radio the crisis may be another "short-term dislocation" for investors but "it's always concerning when they do happen".

The selling on markets comes as investors try to assess the outlook for the global economy as leaders try to bring down inflation by lifting rates while at the same time maintaining growth.

Data this week showed the US economy was in a technical recession, China was being battered by Covid lockdowns around the country, and Europe was on the brink as an energy crisis caused by the Ukraine war compounded its own inflation problems.

Traders will be keeping a close eye on the Friday release of US jobs data, which will give fresh insight into the state of the economy, with a weak reading providing the Fed some room to ease back on its rate hikes.

On oil markets, both main contracts extended Monday's sell-off on falling demand expectations as economies slow.

- Key figures at around 0230 GMT -

Tokyo - Nikkei 225: DOWN 1.6 percent at 27,549.41 (break)

Hong Kong - Hang Seng Index: DOWN 3.1 percent at 19,551.19

Shanghai - Composite: DOWN 2.1 percent at 3,192.45

Taipei - TAIEX: DOWN 1.9 percent at 14,700.48

Dollar/yen: UP at 130.67 yen from 131.61 yen Monday

Euro/dollar: UP at $1.0272 from $1.0262

Pound/dollar: UP at $1.2259 from $1.2255

Euro/pound: DOWN at 83.79 pence from 83.70 pence

West Texas Intermediate: DOWN 0.7 percent at $93.24 per barrel

Brent North Sea crude: DOWN 0.8 percent at $00.19 per barrel

New York - Dow: DOWN 0.1 percent at 32,798.40 (close)

London - FTSE 100: DOWN 0.1 percent at 7,413.42 (close)

S.Pimentel--PC