The meetings between US Treasury Secretary Bessent and Chinese officials were productive. They mainly talked about improving trade relations while ensuring national security. The discussions highlighted the need to address China’s global economic imbalances and the potential for other developed countries to impose tariffs. With the US economy on the rise, more topics became available for conversation. Bessent will meet with President Trump to go over the trade deal. Meanwhile, EU-US trade discussions are looking positive, as noted by Sweden’s Prime Minister. Bessent mentioned that China might face high tariffs on Russian oil due to US secondary tariffs. Recently, Xi invited Trump to China, signaling more engagement in their conversations.

Trade Deficit Reduction

Greer pointed out that the US trade deficit with China could be reduced by at least $50 billion this year. President Trump has the power to change tariffs on Chinese products. On his return from the UK, Trump confirmed that discussions about China trade were productive. The trade deal with India is still pending, with warnings of possible 20-25% tariffs. Trump also made remarks about the mayor of London during his visit. The positive tone of the recent US-China meetings suggests that implied volatility may drop in the weeks ahead. This means strategies like selling option premiums, such as short strangles on broad market indices, could be beneficial. The easing tensions reduce the risk of a significant market shock from new tariffs. We should remain cautiously optimistic about stocks, especially in the US, which are described as “firing on all cylinders.” This situation supports buying call options on the S&P 500. There is also potential in Chinese stocks; as fears of economic separation lessen, call spreads on China-focused ETFs like FXI look promising. The notion that the trade deficit with China is decreasing seems valid and lessens the urgency for sudden actions. Recent data from the U.S. Census Bureau through May 2025 shows that the goods deficit with China is about $23 billion lower than last year. This reinforces the idea of a more stable trade relationship in the near future.

New Global Risks

However, we are noticing new risks emerging beyond the US-China dynamic. A potential trade dispute with India, which could lead to tariffs of up to 25%, suggests we should consider purchasing protective puts on Indian market ETFs. This would help safeguard against negative global trade sentiment if this situation arises. We must also keep an eye on China’s purchases of sanctioned Russian oil. If US secondary tariffs are implemented, it would create a significant risk and could quickly dampen the current positive atmosphere. Historically, trade talks can backtrack unexpectedly. We remember the sharp market fluctuations during the 2018-2019 discussions that often followed a single comment or change in attitude. Thus, holding some inexpensive out-of-the-money puts on major indices is a wise way to protect against this uncertainty. The risk of other countries raising tariffs against China, particularly the European Union, is another concern. The EU is already investigating Chinese subsidies for electric vehicles, and any resulting tariffs could disrupt global supply chains. This would limit global growth potential, even if the US and China manage to establish a stable relationship. Create your live VT Markets account and start trading now.

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