US Treasury Secretary Scott Bessent provided updates on trade talks. He described the EU’s retaliatory actions as a negotiating tactic and mentioned that discussions with the EU are progressing better than before, though a deal is still pending. The anticipated agreement with the EU is likely to fall within the 10-20% range, similar to the deal made with Japan, which is seen as a step towards stability.
Bessent expressed optimism about the relations with China, stating that this would allow the US to engage in larger discussions. He emphasised the preference for supply de-risking over de-coupling with China. The recent 15% deal with Japan concerning autos is a distinct arrangement. As talks proceed, outcomes like the Japan agreement might be seen positively by the market as they reduce potential risks and provide more predictability.
Market Impact on Volatility
Based on these comments, we see a clear signal to sell volatility. His language aims to reduce market anxiety over a trade war, which typically crushes the premiums on options as the perceived risk of large market swings decreases. The CBOE Volatility Index (VIX) has historically fallen on news that reduces geopolitical uncertainty, so traders should consider strategies like short straddles on major indices.
The anticipated European Union deal, even with a 10-20% tariff, removes the worst-case scenario from the table. European automakers, which exported over $40 billion worth of vehicles to the United States last year, would see this as a positive resolution. We believe buying call options on the German DAX index or specific auto manufacturers like Volkswagen and BMW for the coming weeks is a logical play on this expected relief.
Long Term Trends with China
His clarification on China points to a durable, long-term trend that is already happening. U.S. Census Bureau data from early this year shows that Mexico has officially overtaken China as the top exporter to the United States for the first time in two decades, proving this de-risking is not just rhetoric. This supports longer-dated bullish positions on companies benefiting from near-shoring and North American supply chains.
We should look to the Japanese agreement as a historical guide for the market’s reaction. When that deal was announced in late 2019, it removed the threat of broader auto tariffs and provided a modest lift to equities as certainty returned. This precedent suggests that a similar, potentially muted, rally could occur, making short-term call options on industrial ETFs a sensible way to position for an announcement.
