The US government has announced that the farming sector’s tariff investigation will not be finalised for several weeks.
Priority is being given to an investigation into the semiconductor industry. The president is currently attending the Russian/Ukraine summit in Alaska on Friday.
Impact on Agriculture
We see the delay in farming tariff talks as a short-term positive for agricultural commodities. With the immediate threat removed, the high premiums on put options for futures like soybeans and corn should decrease. This provides a window to either sell some of that protection or consider short-term bullish plays.
Looking back at the 2018 trade disputes, we remember soybean futures fell over 20% on tariff news, so this delay is a significant relief for the sector. We are expecting a calmer trading environment for agricultural ETFs like DBA for the next few weeks. The market had been pricing in a worst-case scenario that now seems unlikely to happen before September.
With the semiconductor industry investigation now first in line, we are anticipating higher volatility in tech. The VanEck Semiconductor ETF (SMH) is up nearly 35% this year, making it vulnerable to bad news from a government probe. Buying protective puts on the SMH or individual chipmakers could be a prudent way to hedge against a sudden drop.
Government Focus Shift
This shift in focus by the government is creating a clear divergence in sector risk. Implied volatility on many agricultural options will likely fall while volatility for tech stocks, measured by indices like the VXN, has already ticked up to 25 this week. Traders should adjust their positions to reflect this new timeline.
The president’s focus on the Russia/Ukraine summit this Friday adds another layer of uncertainty for the entire market. Geopolitical outcomes are difficult to predict and often cause broad market reactions, pushing the VIX fear gauge higher. The VIX closed yesterday above 18 for the first time in over a month, showing rising anxiety.
This suggests traders could use index options on the SPY to guard against a negative surprise from the summit. We are also watching energy markets closely, as European natural gas futures have been trading nervously around €45 per megawatt-hour ahead of the meeting. Any escalation could cause a significant spike in energy prices.
