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Stocks fell and US government bond prices rose as US House Speaker Nancy Pelosi’s expected visit to Taiwan raised the prospect of a forceful Chinese military response.

Hong Kong’s benchmark Hang Seng index fell as much as 3.2 per cent on Tuesday, later trimming some of its losses. China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks dropped as much as 2.8 per cent. Both Taiwan’s Taiex and Japan’s Topix shed 1.6 per cent and 1.8 per cent respectively.

In Europe, the regional Stoxx 600 share index fell 0.7 per cent. London’s FTSE 100 added 0.1 per cent.

Concerns over a potential crisis in the Taiwan Strait also spurred a move in to haven assets, with the yield on the 10-year US Treasury bond dropping 0.04 percentage points to 2.56 per cent, near a four-month low.

The moves came as Pelosi prepared to meet Tsai Ing-wen, Taiwan’s president, on Wednesday despite increasingly strident objections from Beijing and with the heightened US-China tensions raising the possibility of disruptions to global trade.

“There is speculation, among other things, that the Chinese may make a military mark and/or impose some form of economic sanctions,” Seyran Naib, a strategist at SEB, commented in a note to clients.

China’s foreign ministry spokesperson Zhao Lijian this week warned that “the Chinese People’s Liberation Army will not sit back” if Pelosi proceeds with the visit.

China conducted live-fire drills on an island in the Taiwan Strait on Monday, with the China Maritime Safety Administration promising more exercises from Tuesday through to Saturday.

John Kirby, US National Security Council communications head, said China “appears to be positioning itself to potentially take further steps in the coming days”, including “military provocations, such as firing missiles in the Taiwan Strait”.

The FTSE All World index of global shares has fallen 15.6 per cent so far this year, dragged lower by Russia’s invasion of Ukraine and a surge in inflation driven by sanctions and trade disruptions that have propelled central banks to raise interest rates.

“Geopolitics was already very much on people’s minds, given the Russia-Ukraine situation,” said Rosie Bullard, portfolio manager at James Hambro & Partners.

“If we have more disruption to trade as a result of heightened tensions, markets will find that difficult and it could be a reason for another leg down in equities.”

Futures trading signalled Wall Street’s S&P 500 share index would fall 0.5 per cent in early New York trades on Tuesday, with contracts tracking the tech-heavy Nasdaq 100 index 0.5 per cent lower.

Brent crude, the oil benchmark, fell 0.9 per cent to $99.14 a barrel, having not closed below $100 since mid-July.

Japan’s yen climbed as much as 0.9 per cent to ¥130.39 against the dollar, its highest level in two months, reflecting haven buying.

More risk-sensitive currencies fell, with sterling 0.5 per cent lower at just under $1.22 and the Australian dollar down 1.4 per cent to near 69 US cents.

Thin summer trading conditions were also exacerbating market moves, analysts said.

“It’s a month of low liquidity and if something big happens it can be multiplied in such thin trading,” Deutsche Bank strategist Jim Reid said in a note to clients.

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