The telephone discussion between Trump and Xi centres on the TikTok deal. This conversation forms part of wider trade discussions.
Positive outcomes or remarks related to trade are anticipated from this dialogue. Currently, Chinese stock markets are experiencing an upswing.
Economic Implications of US China Relations
With a potential thaw in U.S.-China relations, we should expect market volatility to decrease in the coming weeks. This suggests that selling volatility could be a profitable strategy, perhaps through shorting VIX futures or selling credit spreads on the SPX. The VIX has been hovering around 17, and we believe any positive statement could push it down to test its year-to-date lows near the 14 level.
The “red hot” Chinese stock market presents a clear opportunity if trade news is good. The CSI 300 Index is already up over 12% in the last quarter, fueled by strong domestic policy support. We would look to buy call options on China-focused ETFs like FXI or KWEB to ride the momentum that a trade-deal headline would ignite.
On the U.S. side, we should look at companies with high revenue exposure to China. We remember how markets reacted during the trade disputes of 2018 through 2020, where any hint of progress sent shares of companies like Apple, Boeing, and semiconductor firms soaring. Buying short-dated calls on these names offers a direct way to play any positive developments from this dialogue.
Currency and Market Impact
Beyond equities, we are also watching the currency market, particularly the U.S. dollar versus the Chinese yuan. A reduction in trade friction would almost certainly strengthen the yuan, potentially pushing the USD/CNH pair below the 7.25 level it has been struggling with. This view is supported by recent data showing China’s manufacturing PMI beat expectations last month, coming in at 51.5.
