New reciprocal tariffs are set to take effect on Friday. Countries yet to receive a notification about these tariffs will either receive an Executive Order or a letter by tonight.
Recent discussions have been described as successful, particularly with South Korea. Progress is also being made in talks with China, with ongoing direct communication with counterparts.
Anticipating Market Volatility
With new reciprocal tariffs set to begin this Friday, we should anticipate an immediate spike in market volatility. This kind of uncertainty tends to push the VIX higher, so we are looking at buying August VIX call options as a direct hedge. The VIX has been trading in a relatively calm range around 15 for the past month, making these options relatively cheap ahead of the news.
We must identify the sectors most exposed to these new trade barriers. Companies in the industrial and technology sectors, particularly those with complex global supply chains, are at the greatest risk of seeing their margins compressed. Looking at put options on ETFs like the XLI or semiconductor-focused funds for the coming weeks could protect against a sharp downturn.
The conflicting message on China, suggesting both progress and new tariffs, creates a confusing outlook. This implies we could see a significant move in Chinese equities once the actual tariff details are released. A straddle on an ETF like FXI would allow us to profit from a large price swing, regardless of the direction.
Potential Impact On Asian Markets
Positive developments with South Korea single them out as a potential winner in this situation. This could set up a compelling pair trade, going long on the South Korean market via the EWY ETF while simultaneously shorting an index of other Asian markets that may face new restrictions. We should also monitor the Korean won for relative strength against other regional currencies.
This news lands at a delicate moment for the broader economy, as the most recent data for Q2 2025 showed US GDP growth slowing to just 1.6%. We remember how the trade disputes back in 2018 and 2019 preceded an economic slowdown. Tariffs function as a tax on businesses and consumers, which could derail the fragile growth we’ve experienced since inflation cooled off in 2024.
