Insights 
VT 
US Treasury Secretary Scott Bessent reported that the Chinese leadership was concerned about the global response to their export controls. The situation is now resolved regarding permissions, and a transaction is expected soon.
China made a mistake with its actions on rare earth materials, leading to tension. An agreement has been reached, maintaining balance, although China’s future use of critical minerals as leverage is not sustainable.
A New Agreement
A one-year deal has been agreed upon, delaying China’s rare earth regime and involving large US soybean purchases. This deal also permits American control of TikTok in the US market.
The US and China plan to sign the agreement within the week, with both sides confident in its longevity. These developments come despite previous geopolitical tensions between the two nations.
This news points to a significant easing of geopolitical tension, which should cause market volatility to fall sharply in the coming weeks. We expect the VIX index, which has been hovering near 20 on trade worries, to drop towards the mid-teens. This makes strategies like selling puts on strong companies more attractive as the premium will be relatively high right now.
Market Implications
The truce is a clear green light for equity markets, particularly after the S&P 500 has been trading sideways for most of October. We should consider buying call options on major indices like the SPX and NDX to capitalize on a potential year-end rally. Historically, similar de-escalations, like the one we saw in early 2020, preceded a market rally of over 10% in the following quarter.
For commodities, the direct impact is on soybeans, and we should expect futures to gap higher. China’s commitment to “large amounts” of purchases will boost demand at a time when recent USDA reports showed a stronger-than-expected US harvest, keeping prices suppressed. This new demand could push prices back towards the highs we saw earlier this year.
In the tech sector, the resolution for TikTok removes a major cloud hanging over companies with significant Chinese market exposure. This is bullish for semiconductor stocks and other large-cap tech names that have been weighed down by this uncertainty. We will likely see increased open interest in call options for the SMH semiconductor ETF as traders position for a relief rally.
Conversely, the postponement of China’s rare earth export regime is bad news for non-Chinese mining companies. Stocks that rallied on the threat of supply disruption will likely see a sharp reversal, so we should look at buying put options on these specific miners. At the same time, this is a positive for EV and renewable energy companies, which can now expect a more stable supply chain for the next 12 months.
In foreign exchange, this deal should strengthen the Chinese Yuan and other risk-sensitive currencies like the Australian Dollar. The US Dollar, which has been strong as a safe-haven asset, will likely weaken. We can position for this by looking at shorting the Dollar Index (DXY) or using futures to long the offshore Yuan (CNH).
