Lutnick revealed that the European Union is eager to reach an agreement. He also noted that South Koreans are keen on engaging in negotiations.
He observed that the EU has been consistently targeting American tech companies. He stressed the need for the United States to manage TikTok’s algorithm to tackle national security issues, asserting that TikTok should not remain under Chinese control.
Market Opportunities
Based on these comments, we see a market being pulled in two directions, creating distinct opportunities. The stated desire for trade agreements from the European Union and South Korea suggests a potential decrease in volatility for multinational industrial and transport stocks. The U.S. and EU trade relationship alone was worth over $1.3 trillion in goods and services in 2023, so any formal deal would be a major stabilizing event.
However, the remarks about the EU’s daily attacks on American tech create a contradictory signal. We believe this points to continued, targeted volatility within the technology sector, especially for mega-cap names. This was recently reinforced when the EU fined Apple over €1.8 billion in March 2024, showing their aggressive regulatory stance is not just talk.
This tension suggests a strategy of buying protective put options on a tech-focused ETF like the QQQ. At the same time, we could sell put options on an industrial ETF to capitalize on the calmer outlook presented by potential trade deals. This creates a hedged position that can profit from the diverging paths of the two sectors.
Geopolitical Risks And Opportunities
The focus on forcing a sale of TikTok introduces a significant geopolitical risk that could ripple across the entire market. The recent passage of the divest-or-ban bill by the House of Representatives shows this is a fast-moving issue with the potential to provoke a strong response from China. We see this as a clear signal to consider buying call options on the VIX, which is a direct bet on a spike in broad market fear.
Looking back, the 2018-2019 trade war with China caused the CBOE Volatility Index to spike above 30 on multiple occasions, representing periods of intense market stress. If the current situation escalates, a similar pattern could emerge, making long-volatility positions very profitable. Preparing for such a spike seems prudent given the current rhetoric.
The mention of South Korea opens up specific sector plays, particularly in semiconductors and electric vehicles where they are a key U.S. partner. An improved trade relationship could be a bullish catalyst for specific companies in those supply chains. Therefore, we might look at long-dated call options on select semiconductor firms that have strong South Korean ties.
