A US trade delegation has arrived in Stockholm for discussions with China. The initiative aims to maintain current tariff levels and prepare for a potential Trump-Xi summit later this year. The meetings are led by Treasury Secretary Bessent and USTR Greer, with China’s Vice Premier He Lifeng attending.
The discussions will focus on structural issues such as market access, industrial overcapacity, and fentanyl-related trade tensions. While no major breakthroughs are anticipated, both sides aim to formulate a limited agreement. This could involve China’s measures on fentanyl and future investment commitments, potentially leading to partial tariff relief.
### Broader Deal Uncertainty
Despite attempts for agreement, a broader deal is uncertain. Beijing may also be seeking concessions from the US on military presence and controls on tech exports.
We view these talks as a signal to temper expectations for immediate market fireworks. With the CBOE Volatility Index (VIX) recently trading below 15, a level historically considered low, markets are not pricing in a major trade shock. Therefore, we see little reason to buy expensive, short-term protection or make aggressive directional bets based on this meeting alone.
The forecast for a limited agreement rather than a breakdown suggests that implied volatility in certain sectors may be slightly overstated. We believe this creates an opportunity to sell options, such as covered calls on existing holdings in ETFs tracking Chinese equities, to collect premium. This strategy profits from the expected sideways market movement while these foundational discussions led by Mr. Greer and Mr. He continue.
### Industrial Overcapacity and Market Strategy
The focus on industrial overcapacity is particularly relevant given China’s recent mixed economic signals. For instance, while exports have shown some strength, China’s official manufacturing PMI slipped back into contraction at 49.5 in May 2024, highlighting internal pressures. We should remain cautious about any bullish positions on Chinese industrial companies until there is more clarity on market access.
Unlike the 2018-2019 trade war which caused sharp, unpredictable swings, this dialogue appears more measured and aimed at de-escalation. The groundwork being laid for a potential summit later this year suggests any significant policy shift, and related market volatility, is more likely months away. We should therefore consider longer-dated options that can capture a potential move later in the year, rather than focusing on the immediate weekly expirations.
