US stocks fell after news about possible new tariffs. The Dow Jones dropped by 0.55%, the S&P 500 by 0.18%, and the Russell 2000 by 0.64%. In contrast, the NASDAQ index rose by 0.16%. For the trading week, the Dow decreased by 0.30%, while the S&P gained 0.43%. The NASDAQ rose by 1.30%, and the Russell 2000 increased by 0.19%. Despite recent declines, the S&P and NASDAQ achieved record highs.

US Debt Market

In the US debt market, yields have declined today. The two-year yield is at 3.862%, down by 5.44 basis points. The five-year yield is at 3.946%, down by 5.9 basis points. The 10-year yield sits at 4.419%, dropping 4.3 basis points, while the 30-year yield is at 4.990%, down by 2.3 basis points. Over the trading week, most yields decreased. The two-year yield fell by 3.0 basis points, and the five-year yield decreased by 3.2 basis points. The 10-year yield remained unchanged, while the 30-year yield went up by 3.5 basis points. The Fed funds interest rate expects cuts of less than 50 basis points by the end of the year. We think the report about possible tariffs from the former president indicates increased market uncertainty, which plays a big role in derivative strategies. The CBOE Volatility Index (VIX), known as the market’s “fear gauge,” recently surged over 7% due to trade-related news, suggesting we should prepare for greater price fluctuations. Historically, trade disputes in 2018-2019 caused ongoing volatility, and we expect a similar situation could arise again. Given the market’s initial negative response, investing in protective put options on broad market indices like the SPDR S&P 500 ETF (SPY) appears valuable. This strategy provides a direct hedge against potential downturns caused by rising trade tensions. The significant drop in the Russell 2000 indicates that even smaller, domestically focused companies are not safe from these concerns.

Sector Vulnerability

The mention of a 25% tariff on automobiles makes that sector especially vulnerable, prompting us to consider bearish positions. We could buy put options on automakers with strong European supply chains or on an ETF like the First Trust Nasdaq Transportation ETF (FTXR). According to the European Automobile Manufacturers’ Association, the EU exported over 1.2 million cars to the U.S. in 2023, highlighting the potential impact of this policy. On the other hand, the strength of the tech-heavy NASDAQ suggests it might be relatively insulated from direct European trade conflicts. We could create pairs trades, like buying call options on the Invesco QQQ Trust while simultaneously buying puts on the industrials-focused SPDR ETF (XLI). This approach isolates the potential outperformance of tech compared to sectors more affected by the tariffs. We see the sharp decline in bond yields, particularly on the two-year note, as a move towards safety and a sign that the Federal Reserve may need to respond to a slowing economy. If trade tensions rise, the market is likely to price in more significant rate cuts than the expected cuts of less than 50 basis points. Therefore, we consider long positions in Treasury futures or call options on bond ETFs like the iShares 20+ Year Treasury Bond ETF (TLT) to be a sound strategy in light of this possibility. Create your live VT Markets account and start trading now.

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