Insights 
VT 
Economic Impacts of Tariffs
The Dow Jones Industrial Average edged higher after the US markets faced a challenging start. China introduced stringent licensing for foreign export of rare earth minerals, prompting US President Donald Trump to retaliate with trade tariffs. China increased port fees for ships, heightening global trade concerns during a period of declining US job statistics.
The Dow dipped to the 45,450 range before regaining momentum to reach the 46,500 level as US markets reopened after a long weekend. The Trump administration threatened new tariffs on Chinese imports set to begin on November 1 unless China reconsiders its policies. The restrictions on rare earth exports by China could destabilise key US industries such as technology and defence.
Citigroup and Wells Fargo saw a positive market response after better-than-expected earnings. However, key US economic data is stalled due to a government shutdown, affecting the release of vital figures. Tariffs, imposed at entry ports, are intended to make local goods more competitive compared to imports. Economists debate tariffs’ efficacy, considering potential price hikes and trade wars.
Donald Trump plans to utilise tariffs as a support mechanism for the US economy, focusing on major trade partners Mexico, China, and Canada. He aims to leverage tariff revenue to reduce personal income taxes.
The current clash between positive earnings and geopolitical tension creates a perfect storm for market volatility. With the Dow Jones Industrial Average swinging over 1,000 points in a single day, we believe the CBOE Volatility Index (VIX) is the key instrument to watch. We are looking to buy VIX futures or call options, as the index, currently trading around 22, is likely to climb higher as the November 1st tariff deadline approaches.
Trading Strategies in Uncertainty
We are seeing a playbook similar to the one from the 2018-2019 period, where tariff threats created sharp, unpredictable market swings. We remember how the VIX spiked to over 30 during those disputes, punishing traders who were unprepared for the volatility. Historical analysis from that time, including a 2019 report from the Congressional Budget Office, showed that such tariffs ultimately acted as a drag on U.S. GDP and business investment.
Given China’s new restrictions on rare earth minerals, we are looking at bearish positions in highly exposed sectors. Technology and defense are particularly vulnerable, with the iShares Semiconductor ETF (SOXX) already showing signs of pressure after dropping 1.5% in the last week of trading. We think buying put options on ETFs like SOXX or the VanEck Rare Earth/Strategic Metals ETF (REMX) could be a prudent hedge against further escalation.
On the other hand, the strong earnings from Citigroup and Wells Fargo suggest the banking sector may be insulated from the immediate tariff fallout. We are cautiously watching for upcoming reports from other major financials to confirm this trend, possibly using call options on the Financial Select Sector SPDR Fund (XLF). This earnings strength is the main factor preventing a steeper market decline for now.
The ongoing government shutdown creates a dangerous information vacuum, as we are missing key Producer Price Index and Retail Sales data. This forces us to rely more heavily on corporate earnings and administration announcements, which can increase market reactivity to single news items. This uncertainty further supports using options strategies, like straddles on the SPY, to profit from large price moves in either direction.
