US Treasury Chief Bessent announced that the US has held positive discussions with China. He noted that the current relationship with China is functioning effectively.
Bessent expressed optimism that the US economy will see improvement in the fourth quarter. He acknowledged the existence of some distributional issues within the economy.
Potential Trilateral Meeting
Regarding a potential trilateral meeting, Bessent mentioned Budapest as a possible location, stating “could be.”
The positive tone on US-China relations implies a period of lower geopolitical tension, which typically dampens market volatility. Recent data shows US-China trade volumes have already stabilized in Q2 2025, up 2% from the prior year after a prolonged slump. This environment suggests selling volatility may be a sound strategy, perhaps through short straddles on China-exposed ETFs like KWEB.
The forecast for a stronger Q4 US economy should direct our focus toward cyclical sectors. After revised Q2 2025 GDP growth came in at a modest 1.7%, an acceleration would be a significant market catalyst. We believe buying call options expiring in November or December on indices like the Russell 2000 (IWM) offers a way to position for this anticipated pickup.
Distributional Problems in the Economy
Acknowledging distributional problems confirms the K-shaped recovery we have been tracking throughout 2025. July’s retail sales report showed discount retailers’ sales growing at a 5% clip year-over-year, while luxury goods sales were flat. This divergence supports pairs trading, such as going long call options on consumer staples (XLP) against puts on consumer discretionary (XLY).
Finally, the ambiguity surrounding a potential trilateral meeting introduces a specific event risk for European markets. The CBOE EuroCurrency Volatility Index (EVZ) has remained stubbornly elevated above its 2024 lows, reflecting this uncertainty. Traders could consider buying short-dated options on European equities as a cost-effective hedge against any unexpected outcomes from such a meeting.
