US-China trade talks are reportedly set to commence in Stockholm at the Rosenbad government office. The discussions aim to extend the current 90-day trade truce between the two countries.
Both nations are seeking to avoid escalating tariffs while attempting to reach a comprehensive agreement. Progress appears limited, as China has demonstrated its leverage by restricting rare earth mineral exports to the US.
Market Volatility Expectations
Given the planned discussions in Stockholm, we should anticipate a spike in market volatility. Any headline, positive or negative, will likely cause sharp, short-term price movements. We saw the VIX, which measures expected volatility, jump over 40% in a single week during the August 2019 tariff escalation, and we should be prepared for similar reactions.
The mention of rare earth minerals is a specific and actionable threat for us. This directly targets the technology and defense manufacturing sectors, which are heavily reliant on these materials for everything from smartphones to missile guidance systems. We should consider buying protective put options on semiconductor ETFs or specific tech giants that have vulnerable supply chains.
The expectation of a 90-day extension creates a tricky environment where the immediate crisis is averted but the underlying tension remains. This suggests a “range-bound” market with intermittent fear spikes might be the most likely scenario. This environment is ideal for strategies like selling iron condors on broad market indices, which profit from the market staying within a predicted price range.
Rare Earth Export Decline
Considering China’s official data showed rare earth exports already fell 7.2% in August from the prior year, this isn’t an idle threat. We can use this information to structure calendar spreads, selling short-dated options to capture premium from the expected “status quo” while holding longer-dated options as a hedge. This allows us to profit from the immediate calm while being insured against a sudden breakdown in the talks reported by Low.
