Senior U.S. and Chinese officials convened in Stockholm for over five hours on Monday to discuss extending the current tariff truce by 90 days. The discussions included U.S. Treasury Secretary Scott Bessent and China’s Vice Premier He Lifeng, focusing on addressing trade and technology disputes, with China seeking relief from tariffs and technology export restrictions.
Analysts indicate that a potential Trump-Xi summit could ease tensions, with a deadline of August 12 to finalise a long-term agreement. Preliminary deals were struck in May and June, but negotiators left Monday’s session without public statements.
Ninety Day Extension
A 90-day extension of the truce, originally agreed in mid-May, is anticipated to prevent further tariff escalation. This could facilitate a potential Trump-Xi summit in late October or early November, continuing efforts to resolve ongoing disputes between the two nations.
Breaking news over the weekend suggested that the U.S. and China were to extend the tariff pause by another 90 days. The talks continue on Tuesday, and the expected extension aims to calm tensions before the proposed summit.
Given the market has already priced in a 90-day extension, we believe implied volatility will remain low across major indices in the immediate future. The CBOE Volatility Index (VIX) is currently trading near 13.5, well below its historical average, which suggests traders do not expect a major disruption from these talks. This environment makes buying call or put options relatively cheap, but it also presents opportunities for those selling premium.
Trading Strategies and Risks
We see an advantage in strategies that profit from this expected calm, such as selling short-dated iron condors or credit spreads on the S&P 500. The key is to capitalize on the market’s complacency before the August 12 deadline. Historical data from the 2018-2019 trade war shows that periods of negotiation following a truce often lead to range-bound markets and a gradual decay in option premiums.
The main risk is a sudden breakdown in negotiations, which would cause a sharp spike in volatility, much like the VIX jumped over 40% in early May 2019 when talks unexpectedly collapsed. To hedge against this, we advise holding a small number of long-shot, out-of-the-money puts on technology or semiconductor ETFs, as these sectors are most sensitive to a negative outcome. A negative statement from either Bessent’s or Lifeng’s side could trigger this move with little warning.
Recent economic reports, like China’s weaker-than-expected July exports which fell 1.2% year-over-year, suggest Beijing is under pressure to maintain market access and avoid further tariffs. This reinforces our view that an extension is the most probable outcome. Therefore, the prudent strategy is to position for continued stability while maintaining a cheap hedge for a low-probability, high-impact negative surprise.
