Asian stocks began the week positively, driven by easing US-China trade tensions. Key US and China negotiators reached a consensus on major disputes, setting the stage for a meeting between Presidents Trump and Xi Jinping to finalise a trade deal.

US Treasury Secretary Scott Bessent mentioned that the 100% tariffs on Chinese goods are no longer under consideration. China will increase soybean purchases and delay rare-earth export controls for a year.

Performance Of Asian Markets

Japan’s Nikkei 225 rose 2% to over 50,300, Hong Kong’s Hang Seng gained 1% surpassing 26,400, and South Korea’s KOSPI advanced 2% near 4,000. China’s Shanghai Composite increased by 1% to around 4,000, while the Shenzhen Component rose 1.26% to nearly 13,450.

Asian markets benefited from a weaker US Dollar, linked to soft US inflation supporting potential Federal Reserve rate cuts. The CME FedWatch Tool shows a 97% chance of a rate cut in October and 96% in December.

Asian stock markets are driven by company earnings, economic fundamentals, and central bank policies. Political stability, technological progress, and US market cues also influence these markets, with risks including geopolitical tensions and currency fluctuations affecting valuations.

Implications Of Geopolitical Developments

With major geopolitical risks like the US-China trade war being taken off the table, we should expect implied volatility to fall sharply in the coming weeks. The CBOE Volatility Index (VIX), which we saw spike into the high 20s during previous tariff escalations in the late 2010s, is likely to trend back toward the low teens. This environment favors strategies that profit from falling volatility, such as selling strangles on broad indices like the Hang Seng or KOSPI.

The strong upward momentum, especially the Nikkei 225 breaking the historic 50,000 level, presents a clear directional signal for us. To capitalize on this, we should consider buying call options with expirations in late November or December to capture further upside as capital flows back into Asian equities. This is a significant moment, considering it took over three decades for the Nikkei to sustainably break its 1989 bubble-era high, a milestone we only passed in 2024.

Given that the CME FedWatch tool shows near-certainty of Fed rate cuts, the US Dollar should remain under pressure. This reinforces the case for being long on Asian currencies, particularly those of export-heavy economies like Japan and South Korea. We can express this view by buying call options on the Japanese Yen (JPY) or by using futures to bet against the dollar index (DXY).

Specific sectors are also signaling clear opportunities based on the deal’s reported terms. China’s agreement to make “substantial” soybean purchases suggests we should look at bullish positions in agricultural commodity derivatives, such as buying soybean futures contracts. Additionally, the one-year pause on rare-earth export controls removes a major supply chain risk for global technology and EV manufacturers, making call options on semiconductor ETFs an attractive play.

While the outlook is positive, the deal is not finalized until the presidential meeting on Thursday. A prudent approach would be to purchase some cheap, out-of-the-money put options on a major index like the S&P 500 as a portfolio hedge. This insurance is relatively inexpensive in a falling volatility environment and protects our positions against any last-minute breakdown in talks.

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