The meetings between US Treasury Secretary Bessent and Chinese officials were described as constructive. Discussions focused on balancing the trade relationship, with an emphasis on maintaining national security. The meetings addressed the unsustainability of China’s global imbalances, with concerns that other developed economies might raise tariff barriers. The US economy is improving, facilitating more topics for discussion.
Bessent will meet with President Trump to review the deal, with EU-US trade talks also being positively received by Sweden’s Prime Minister. Bessent relayed that China faces potential high tariffs on Russian oil due to US secondary tariff legislation. A recent phone call from Xi invited Trump to China. Overall, conversations with China are becoming more engaging.
Trade Deficit Reduction
Greer noted that the US trade deficit with China could decrease by at least $50 billion this year. President Trump has the authority to adjust tariffs on Chinese goods. Trump, returning from the UK, confirmed a productive meeting on China trade. The India trade deal remains unresolved, with potential tariffs of 20-25%. Trump made comments about London’s mayor during his trip.
Based on the constructive tone of the recent US-China meetings, we believe implied volatility is likely to decrease in the coming weeks. This suggests a strategy of selling option premium, such as short strangles on broad market indices, could be profitable. The apparent de-escalation reduces the immediate risk of a major market shock from new tariffs.
We should be cautiously optimistic about equities, particularly US markets, which are described as “firing on all cylinders.” This environment supports owning call options on the S&P 500. There is also an opportunity in Chinese stocks, as the fear of decoupling subsides, making call spreads on China-focused ETFs like FXI attractive.
The claim that the trade deficit with China is shrinking is credible and reduces the pressure for sudden, aggressive action. Recent data from the U.S. Census Bureau through May 2025 confirms this trend, showing the year-to-date goods deficit with China is roughly $23 billion lower than the same period last year. This strengthens the case for a more stable trade relationship in the near term.
New Global Risks
However, we see new risks emerging outside of the direct US-China relationship. The potential for a new trade dispute with India, with threats of tariffs as high as 25%, means we should consider buying protective puts on Indian market ETFs. This serves as a hedge against global trade sentiment turning negative if this new front opens up.
We must also monitor the situation regarding China’s purchases of sanctioned Russian oil. Any implementation of US secondary tariffs would be a significant negative catalyst, creating a spike in geopolitical risk. This is a specific trigger we need to watch that could quickly invalidate the current positive sentiment.
Historically, we know that progress in trade talks can reverse unexpectedly. We remember the sharp market swings during the 2018-2019 negotiations that often followed a single statement or change in tone. Therefore, holding some cheap, out-of-the-money puts on major indices remains a prudent way to hedge against this unpredictability.
The potential for other economies to raise tariff barriers against China, especially the European Union, is a key long-term risk. The EU has already launched investigations into Chinese subsidies for electric vehicles, and any resulting tariffs could disrupt global supply chains. This could limit the upside for global growth even if the US and China find a stable path forward.
