US House Speaker Nancy Pelosi's visit to Taiwan negatively affected the stock markets as investors dumped risky equities.
Stock markets have dropped as investors dumped risky equities on spiking China-US tensions over a visit by House Speaker Nancy Pelosi to Taiwan.
China's defence ministry spokesman on Tuesday vowed "targeted military actions" in response to her visit.
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.
Any 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."
Observers do not think the move will spark a conflict but moments before her arrival in Taiwan on Tuesday, Chinese state media announced advanced Su-35 fighter jets were crossing the Taiwan Strait.
Heightened tensions between the world's two superpowers have sent shivers through trading floors, compounding worries that Russian attack on Ukraine could escalate into a wider war.
'Investors very nervous'
"We're seeing more risk aversion as Nancy Pelosi's trip to Taiwan generates numerous unsettling headlines at a time of strained ties between the US and China," said OANDA analyst Craig Erlam.
The trip was "making investors very nervous", he said.
Pelosi's visit hit US stocks, with all three main indexes dropping on Tuesday in early morning trading before the tech-rich Nasdaq Composite Index and broad-based S&P 500 were up in the afternoon.
Asian stocks also fell earlier, though some markets recovered as the day wore on.
Hong Kong and Shanghai led losses, shedding more than two percent, while Taipei was off more than one percent along with Tokyo.
In Europe, Frankfurt and Paris were down at the close of trading, while only London ended the day flat after oil giant BP announced soaring profits.
The safe-haven yen jumped to a two-month high against the dollar.
The Taiwan dollar meanwhile sank to its lowest since April 2020 before bouncing back.
The flare-up in tensions comes less than a week after US President Joe Biden and Xi Jinping held telephone talks during which the Chinese leader warned the United States not to "play with fire".
The market selloff comes as investors try to assess the outlook for the global economy as leaders try to bring down sky-high inflation by lifting rates while at the same time maintaining growth.