The US has temporarily halted export restrictions on key technology to China to encourage smoother trade relations. This move aims to facilitate a meeting between Trump and Xi later in the year, with the commerce department instructed to avoid strict measures against China.
China’s previous use of rare earth exports as leverage in May has partly influenced the decision. Despite this approach, it’s unclear if it will lead to a more significant interaction between Trump and Xi.
Us China Temporary Truce
The US and China have seemingly agreed to a temporary truce, which is likely to be extended, with no major agreements expected. The current focus is on maintaining a cordial relationship between the two nations.
Based on the reported freeze of export controls, we believe the immediate response for traders should be to anticipate lower market volatility. This temporary truce reduces the short-term risk of sudden, policy-driven market shocks that have rattled investors in the past. Historically, escalations in the trade war, such as in mid-2019, sent the VIX volatility index soaring above 20, while the current environment has seen it hovering at a much lower 13, suggesting complacency that could be profitable to sell into.
We see this as a direct tailwind for technology and semiconductor stocks with high exposure to the Chinese market. Companies like Qualcomm, which recently reported that over 60% of its revenue comes from China, are prime candidates for bullish options strategies like buying call options or selling cash-secured puts. The removal of this immediate threat should provide a short-term lift to their valuations.
Conversely, the reported influence of China’s rare earth leverage means a de-escalation is a headwind for producers outside of that country. We would expect less investor interest in miners that benefited from the narrative of supply chain diversification and conflict. This environment makes strategies like buying put options on these specific mining ETFs or stocks a potential hedge against the broader market’s optimism.
Caution On Temporary Fix
This approach of maintaining a cordial relationship should be viewed with caution, as it appears to be a temporary fix. While the news is positive, we note that U.S. goods trade with China fell by over $70 billion in 2023, a clear sign of a longer-term strategic shift. Therefore, any bullish derivative positions should be for the near-term, as the underlying issues between the two nations remain unresolved and are merely being postponed.
