Trump's Taiwan talk rattles chip stocks, gold shines as rate cuts beckon

By Tom Westbrook and Naomi Rovnick

SINGAPORE, LONDON (Reuters) -Gold hit a record and bonds rallied on Wednesday, while chip stocks tumbled after U.S. presidential candidate Donald Trump sounded lukewarm about his commitment to defending Taiwan.

Sterling ticked higher after British inflation held at 2% year-on-year in June against forecasts for 1.9%, with services inflation stuck at an uncomfortable 5.7%.

Europe's Stoxx share index futures traded 0.2% lower. S&P 500 futures were also 0.5% lower after the cash index hit a record high in the previous session.

In Taiwan, TSMC fell 3%, wiping out close to $30 billion from the market value of the world's largest chipmaker and a key player in the global supply chain.

The slide came after Trump questioned U.S. support for Taiwan in an interview with Bloomberg Businessweek, saying the closely monitored island that sits roughly 100 miles from the mainland Chinese coast should pay for U.S. protection.

ASML, the largest equipment supplier to chipmakers, reported better-than-expected profit in the second quarter, but its shares dropped as much as 7.7%.

It was unclear exactly what Trump was planning, but his selection of trade hawk J.D. Vance as his running mate had already put markets on notice that China will figure heavily in his foreign policy thinking.

Chinese stocks were subdued for a second straight day.

The Taiwan dollar slipped slightly to a two-week low. China's yuan steadied at 7.2673 per dollar as markets waited on news from a leadership meeting in Beijing which ends on Thursday.

"It is more and more clear to me that Trump should be bullish for USD for at least a while," said Brent Donnelly, president at analytics firm Spectra Markets, as he is expected to impose tariffs and run a higher budget deficit.

"It's hard to imagine USDCNH ending 2024 below 7.25 on a Trump victory in November but it's not hard to imagine it closing above 7.50," he said, referring to the dollar-yuan pair.

GOLD GLITTERS

In Asia, New Zealand shares hit their highest since March 2022 after data showed inflation slowing, though the rates market dipped and the currency rose on sticky domestically driven inflation. [.AX][NZD/]

Treasuries held gains that had pushed 10-year U.S. yields to four-month lows overnight after Federal Reserve Chair Jerome Powell said recent cooling in inflation "adds somewhat to confidence" that consumer prices are coming under control.

Fed funds futures have fully priced a U.S. rate cut for September, followed by two more before the end of January 2025.

Ten-year yields were steady at 4.167% and two-year yields hovered at 4.45%, while German Bund yields fell 1 bp to 4.423%.

Lower yields helped propel gold sharply higher and through chart resistance around $2,450 per ounce despite a broadly firm dollar. It touched a record $2,482 overnight. [GOL/]

"Gold's ability to find support in any condition this year is worth highlighting," said Commonwealth Bank of Australia commodity strategist Vivek Dhar.

"While gold prices face uncertainty in coming months, the uncertainty has a positive skew, raising the risk that gold rises above our forecast of $2,500/oz by the end of the year."

The Japanese yen strengthened as trading began in Europe on Wednesday, pushing the dollar down 0.75% to 157.08, well off early July's 38-year high of 161.96, after a few rounds of likely intervention from Tokyo authorities late last week.

The euro was steady at $1.0905.

Oil prices slipped slightly, weighed by signs of weakening demand from China.

Brent crude futures rose 0.4% to $84.04 barrel and U.S. crude futures gained 0.5% to trade at $81.12. [O/R]

(Editing by Sam Holmes, Kim Coghill and Arun Koyyur)