US Treasury Secretary Bessent affirmed his belief that the US Supreme Court will uphold Trump’s tariffs during an interview with Reuters. He acknowledged other potential statutes for justifying tariffs but dismissed them as less efficient. Bessent discussed progress in US-European relations, particularly concerning India’s Russian oil purchases, and labelled a recent meeting with non-Western leaders in Shanghai as ‘performative’. He further accused India and China of supporting Russia in the Ukraine conflict.
Additionally, Bessent suggested a strong likelihood of Miran joining the Federal Reserve before the September meeting. He also commented on Lisa Cook, mentioning her lack of denial regarding mortgage fraud allegations. On tariffs, Bessent referenced a recent US Federal Appeals Court ruling that declared most of Trump’s tariffs illegal, which is expected to be appealed.
A Prime Environment For Price Swings
With the Supreme Court’s decision on tariffs pending, we see a clear signal for a long volatility strategy. The uncertainty between the appeals court ruling and Bessent’s confidence creates a prime environment for price swings. The CBOE Volatility Index, or VIX, has already crept up to 18.5, and we expect it could test the mid-20s as the court’s decision date nears.
The administration’s labeling of India and China as “bad actors” points toward continued geopolitical risk that will likely weigh on emerging markets. We saw a similar dynamic in 2019 when tariff escalations led to a 10% drop in the iShares MSCI Emerging Markets ETF (`EEM`) over two months. Buying protective put options on `EEM` or specific China-focused ETFs seems like a prudent hedge against further rhetoric or action.
Federal Reserve And Interest Rates
Uncertainty at the Federal Reserve adds another layer for traders to watch ahead of the September meeting. The potential seating of Miran could disrupt the consensus on the board, making the path of interest rates less predictable. The CME FedWatch tool now shows futures markets are pricing in a wider range of outcomes for the next meeting than they were just a month ago, suggesting traders should be positioned for a surprise.
For those looking at specific sectors, the tariff outcome will directly impact industrial and technology supply chains. Options on steel and aluminum ETFs, like `SLX` and `XME`, will likely see a surge in volume and implied volatility. Looking back at the 2018-2022 period, we recall that companies heavily reliant on Chinese components saw their stock valuations lag the broader S&P 500 by as much as 15% during periods of high trade tension.
