The U.S. is gearing up for a new round of trade discussions with China next week. Trump has transitioned from applying pressure to focusing on negotiation to attain a deal that boosts U.S. access to Chinese markets, with an emphasis on business and technology sectors.
Technology Sector Impact
An indication of this approach is the recent removal of a ban on exporting Nvidia’s AI chips to China. This step eased previous national security constraints and encouraged increased U.S. tech sales to China. Trump is reportedly intent on securing a deal, while the White House underscores that diplomacy is the president’s preferred strategy. The aim is to secure improved trade terms for Americans.
Chinese negotiators, led by Vice Premier He Lifeng, are set to engage with their U.S. counterparts. The meeting is scheduled to occur in Stockholm next week.
Based on the president’s shift in strategy, we believe traders should anticipate a significant decrease in market volatility. Historically, escalations in the U.S.-China trade war have caused the CBOE Volatility Index (VIX) to spike, but signals of a deal tend to calm investor fears. This suggests that selling volatility through instruments like VIX futures or constructing option credit spreads could be a prudent approach in the coming weeks.
The explicit mention of easing restrictions on technology sales is a key tell for sector-specific plays. Tech giants like Apple, which derived nearly 20% of its revenue from Greater China in its last fiscal year, stand to benefit directly from improved trade relations. We see this as a signal to establish bullish positions on the tech sector, possibly through call options on the Nasdaq-100 ETF (QQQ) or individual semiconductor stocks.
Trade Agreement Implications
This pivot away from pressure tactics also has positive implications for industrial and agricultural sectors that were hit hard by prior retaliatory tariffs. A successful agreement following the meeting with Mr. He would likely boost companies highly exposed to global trade and Chinese demand. We are therefore considering long positions on futures for commodities like soybeans or call options on industrial ETFs that have historically rallied on positive trade news.
A potential deal would also invigorate China’s own market, which has faced significant headwinds from economic uncertainty. The Shanghai Composite Index has historically shown strong positive reactions to signs of de-escalation with the United States. Consequently, we believe this is an opportune moment to look at bullish derivative strategies on Chinese-focused ETFs, such as the FXI, to capitalize on a potential rebound.
Finally, a risk-on environment spurred by a trade agreement would likely influence currency markets, potentially weakening the U.S. dollar as a safe-haven asset. Given the U.S. trade deficit with China stood at over $279 billion last year, any deal normalizing trade could strengthen the Chinese yuan. This makes derivatives that bet on a stronger yuan relative to the dollar an attractive proposition.
