Asian stocks started the week on a positive note, boosted by easing trade tensions between the US and China. Key negotiators from both countries have reached agreements on significant issues, paving the way for a meeting between Presidents Trump and Xi Jinping to finalize a trade deal. US Treasury Secretary Scott Bessent announced that the 100% tariffs on Chinese goods are off the table. Additionally, China plans to increase its soybean purchases and postpone rare-earth export controls for a year.

Performance of Asian Markets

Japan’s Nikkei 225 rose 2% to over 50,300. Hong Kong’s Hang Seng gained 1%, surpassing 26,400, while South Korea’s KOSPI advanced 2% to nearly 4,000. China’s Shanghai Composite increased by 1% to around 4,000, and the Shenzhen Component jumped 1.26% to nearly 13,450. Asian markets are benefiting from a weaker US Dollar due to soft US inflation, which hints at possible Federal Reserve rate cuts. According to the CME FedWatch Tool, there is a 97% chance of a rate cut in October and a 96% chance in December. Asian stock markets are influenced by company earnings, economic conditions, and central bank policies. Factors like political stability, technological advancements, and cues from the US market also play a role. However, risks from geopolitical tensions and currency fluctuations can affect valuations.

Implications of Geopolitical Developments

With major risks, such as the US-China trade war, lessened, we expect implied volatility to drop sharply in the coming weeks. The CBOE Volatility Index (VIX), which spiked into the high 20s during past tariff escalations, is likely to decrease toward the low teens. This environment benefits strategies that profit from falling volatility, such as selling strangles on broad indices like the Hang Seng or KOSPI. The strong momentum, particularly the Nikkei 225 breaking the historic 50,000 mark, signals a clear trend. To take advantage of this, consider buying call options that expire in late November or December to capture further gains as money flows back into Asian stocks. This is a significant moment, as it has taken over thirty years for the Nikkei to sustainably surpass its 1989 bubble-era high—a milestone achieved in 2024. With the CME FedWatch tool indicating a near-certainty of Fed rate cuts, the US Dollar should remain under pressure. This strengthens the case for investing in Asian currencies, especially from export-heavy economies like Japan and South Korea. One way to express this view is by buying call options on the Japanese Yen (JPY) or betting against the dollar index (DXY) using futures. Specific sectors are also presenting clear opportunities based on the terms of the trade deal. China’s commitment to make “substantial” soybean purchases suggests a bullish outlook for agricultural commodities. This can be achieved by buying soybean futures contracts. Moreover, the one-year delay on rare-earth export controls lowers a significant supply chain risk for global tech and EV manufacturers, making call options on semiconductor ETFs an attractive option. Despite the positive outlook, the deal isn’t finalized until the presidential meeting on Thursday. A wise strategy would be to buy some inexpensive, out-of-the-money put options on a major index like the S&P 500. This hedge is affordable in a declining volatility environment and protects our positions against any last-minute breakdown in negotiations. Create your live VT Markets account and start trading now.

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