The second day of discussions between the US and China concluded with both parties reporting candid and constructive talks. China’s top trade negotiator, Li, stated that the US and Chinese teams continued using the trade consultation mechanism.
They acknowledged the importance of maintaining healthy and stable relations between the two nations. Comprehensive exchanges covered macroeconomic topics and a review of the Geneva consensus implementation.
Trade Truce Extended
China and the US agreed to extend the trade truce, aiming to prolong the pause on reciprocal tariffs and Chinese countermeasures. Both parties committed to continuing their communication efforts.
The extension of the trade truce between the US and China is a significant de-escalation. We believe this removes a major source of near-term market anxiety, likely pushing the VIX down from its recent highs near 17 towards the 13-14 range. This signals a period of calmer trading ahead in the coming weeks.
With implied volatility expected to contract, we see an opportunity in selling premium. Strategies like covered calls on existing holdings or selling cash-secured puts on stocks we wish to own at lower prices become more attractive. The goal is to capitalize on the decay of option prices in a less volatile environment.
Impact On Markets
We expect a relief rally in sectors highly exposed to trade tensions, particularly semiconductors. The VanEck Semiconductor ETF (SOXX), which has been sensitive to trade headlines, could see a significant move upward from its current levels. We would consider buying short-dated call options to play this potential rebound.
Agricultural commodities, which have been used as a tool in the trade dispute, should also benefit. We anticipate renewed Chinese purchases could boost November soybean futures (ZS1!), which have been trading in a tight range. Historically, even the hint of a truce has caused double-digit percentage rallies in soybean prices over a few weeks.
This stability is also a positive catalyst for Chinese equities, which have underperformed due to economic uncertainty. We could see the Hang Seng Index (HSI) test its year-to-date highs as global capital flows back into the region. Using options on large-cap Chinese ADRs or ETFs like FXI provides a direct way to gain this exposure.
However, we must recognize that this is a pause, not a permanent resolution of underlying geopolitical issues. While we are selling near-term volatility, it may be prudent to maintain some longer-dated portfolio protection. The fundamental disagreements have not been solved, meaning volatility could easily return later in the year.
