The Dow Jones Industrial Average saw a slight recovery on Thursday, rising by about 150 points and reducing losses from the prior session. Despite concerns over US-China trade tensions, optimism from strong earnings reports and expectations of Federal Reserve interest rate cuts sustains market confidence.

Crude Oil prices increased after China halted purchases from Russia due to new US sanctions on Russian Oil distributors. This surge poses concerns for inflation and could challenge the Federal Reserve’s plans for further rate cuts, as it aims to conduct two quarter-point cuts by year-end amidst rising energy costs.

Implications of US Tariffs on Chinese Goods

China remains under scrutiny as the US plans a 155% tariff on Chinese goods and export controls starting from November 1st. The earnings season supports confidence, with 80% of S&P-listed companies surpassing analyst expectations, despite some companies like Tesla reporting underwhelming results.

The US Consumer Price Index data, scheduled for release, might impact rate cut expectations if inflation figures remain high. With interest rates set for review, market anticipation remains focused on two further cuts by the year’s end amidst persistent supply-chain challenges and multi-decade high inflation rates.

With the pivotal US CPI inflation report due tomorrow, we expect market volatility to increase significantly. The CBOE Volatility Index (VIX) has already climbed to over 18 this week, up from the calmer levels below 14 we saw earlier in the month, signaling that traders are bracing for a major market-moving event. This setup suggests using options to trade the expected choppiness in the S&P 500 and Nasdaq indices following the data release.

Market Strategy and Tariff Concerns

The Dow is near record highs, but the threat of new 155% tariffs on Chinese goods starting November 1 creates a risky environment for holding long positions unprotected. We saw in the 2018-2019 period how similar trade war escalations led to sharp equity drawdowns, making this a familiar pattern of risk. Therefore, buying protective puts on index ETFs like SPY or DIA seems like a sensible strategy to hedge against a sudden downturn.

While the market has almost fully priced in an interest rate cut at the Fed’s meeting next week, the sudden surge in WTI crude oil to over $95 a barrel is a new and serious concern. This sharp rise in energy prices could easily push the upcoming CPI reading higher than forecast, putting the Fed in a difficult position. We see an opportunity in options on Treasury futures to trade a potential spike in interest rate volatility if the Fed signals any hesitation.

The geopolitical tension driving oil prices higher looks set to continue, as China’s halt on Russian oil purchases represents a significant disruption to global energy flows. Data from 2024 showed that China was Russia’s single largest oil customer, so this move will have lasting effects on supply chains and keep upward pressure on prices. For traders, this makes long positions in crude oil futures (CL) or call options on energy stocks a direct way to capitalize on this trend.

Create your live VT Markets account and start trading now.