Talks between South Korean ministers and US officials have faced delays due to a scheduling conflict with US Treasury Secretary Scott Bessent. However, a meeting is now set for Friday to analyse a tariff agreement between the US and Japan.
During the discussions, South Korea proposed a mutually beneficial plan to the US Commerce Secretary, which the US found interesting. South Korea aims for a deal similar to the one the US has with Japan, anticipating tariff reductions in the 10-20% range.
Impact On Risk Assets
This potential deal could positively impact risk assets, though much of this optimism is already reflected in current market prices. If negotiations do not succeed, South Korea might face a 25% tariff from August 1, though an extension is likely if talks are near completion.
We believe the market has already priced in the expected 10-20% tariff agreement, which limits the potential for significant gains from here. The KOSPI index has remained resilient, hovering near the 2,800 mark, suggesting investor optimism is already factored in. The real trading opportunity, therefore, lies not in the expected outcome, but in positioning for a deviation from it.
Given the August 1 deadline, we see a greater risk to the downside if talks referenced by Dellamotta falter. A complete failure to secure a deal would be a shock, likely sending the Korean Won lower against the dollar and punishing export-heavy stocks. Traders should consider buying out-of-the-money put options on major Korean ETFs as a cost-effective way to hedge against a negative surprise following the meeting with Greer.
Betting On Market Volatility
The most compelling strategy is to bet on an increase in market volatility itself. The VKOSPI, South Korea’s volatility index, has recently traded below 15, a historically low level which makes options relatively cheap. We recommend using straddles or strangles, which profit from a large market move in either direction, to capitalize on the uncertainty leading up to the deadline.
History from previous US trade negotiations shows that final outcomes often trigger sharp, binary market reactions. South Korea’s exports of vehicles to the U.S. were valued at over $45 billion in 2023, so any tariff news will have a direct and immediate impact on that critical sector. We will be watching for any signals following the postponed meeting with Bessent.
