Trump's Taiwan talk rattles Wall Street as chip stocks tumble

By Naomi Rovnick

LONDON (Reuters) -Geopolitical risks weighed on Wall Street on Wednesday after U.S. presidential candidate Donald Trump sounded lukewarm about defending Taiwan, sending chipmakers' shares lower and helping propel gold prices to record highs.

Futures contracts tracking the U.S. S&P 500 equity benchmark equity index dropped by 1% after the index hit a record high in the previous session.

Shares in artificial intelligence chipmaker Nvidia, fell 3.1% in pre-market trading after a rocky Asian session for Taiwan's TSMC, which closed 2.4% lower.

The Netherlands' ASML, the largest equipment supplier to chipmakers, dropped as much as 7.7% in European morning trade.

MSCI's broad index of world shares. was flat.

The tech mood soured after Trump questioned U.S. support for Taiwan in an interview with Bloomberg Businessweek, saying the closely monitored island that China claims as its own territory should pay for U.S. protection.

U.S. and Taiwanese officials have claimed for many years that a Chinese invasion of Taiwan would heavily disrupt global trade and high-tech supply chains.

Before Wednesday, markets had formed a cautiously optimistic view of a second presidency for Republican property tycoon Trump, who political betting sites tip to beat incumbent Democrat Joe Biden in the November 5 battle for the White House.

"Many strategists have suggested (Trump) is bullish for equities, and 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."

While Trump's plans for Taiwan remain unclear, he has already signalled reduced U.S. support for strategic allies by picking Ohio Senator J.D. Vance, who opposes military aid for Ukraine, as his running mate.

CURRENCY SWINGS

In foreign exchange markets the dollar lost more than 1% against the yen as fresh data from the Bank of Japan suggested Tokyo was spending heavily on buying the currency to drag it off multi-decade lows.

The currency pair traded at 156.4 yen per dollar, having last week crossed the 160 mark that investors view as Japanese authorities' trigger for intervention.

Sterling touched a year-high of $1.3032 after data on Wednesday showed the annual rate of British inflation held at 2% in June against forecasts for a 1.9% increase and traders pared back their bets for a Bank of England rate cut in August.

Spot gold rose 0.2% to an all-time high of $2,473/29 per ounce on haven buying, and as increased expectations for U.S. interest rate cuts added to the pressure on the dollar.

Gold, priced in dollars, has a strong inverse relationship with the U.S. currency, as well as Treasury yields.

Commonwealth Bank of Australia commodity strategist Vivek Dhar said the gold price may even overshoot his existing target price of $2,500/oz by the end of the year.

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

Federal Reserve Chair Jerome Powell on Monday said he had more confidence that consumer prices were coming under control.

Ten-year Treasury yields were little changed on the day at 4.173%, around a four-month low. Two-year yields edged up to 4.461%.

Germany's 10-year bund yield, a benchmark for European debt markets, was close to its lowest in three weeks at 2.42%.

Bond yields fall as prices rise.

Elsewhere, oil prices were steady, with Brent crude futures 0.2% higher at $83.94 barrel and U.S. crude futures gaining 0.4% to trade at $81.10. [O/R]

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