US Treasury Secretary Scott Bessent mentioned that tariffs might have unintended consequences, but there’s still a chance for negotiations. Soon, we’ll see announcements about several trade deals that will involve significant US investments aimed at bringing manufacturing back to the country. There are doubts about the August 1 deadline because of previous extensions. If tariffs are restored to April levels, it could lead to another downturn in economic growth.

Negotiations With China

For the August 12 deadline with China, talks are set for Monday and Tuesday. There’s a possibility of an extension, with the hope that China will reduce its manufacturing surplus and become more open to the market. The goal is for the US to increase manufacturing while China increases its consumption, which would be beneficial for both sides. We see the August 1 deadline as a potential source of market fluctuations, whether it’s an empty threat or not. With the VIX volatility index recently low, options are cheaper, creating an opportunity for a big market move. If talks break down, volatility could rise sharply, making long-volatility strategies appealing.

Evaluating Tariff Impacts

Bessent’s assertion that tariffs are bringing manufacturing back should be taken with caution. The latest ISM Manufacturing PMI is close to the 50-point mark, indicating stagnation instead of growth. Until we observe a consistent rise in factory orders and industrial production, we should remain skeptical. The possibility of a growth scare if tariffs revert to April levels is a genuine concern, echoing the trade war in 2018-2019. During that time, tariff announcements often led to sharp market declines and increased volatility. Therefore, it might be wise to consider buying downside protection on major indices like the SPX to guard against history repeating itself. In the China negotiations, a “home run” scenario seems unlikely. Recent data shows China’s industrial production is still growing faster than retail sales, indicating a continuing manufacturing surplus. An extension of discussions seems most probable, but it only delays the uncertainty. In the coming weeks, traders should look at strategies that benefit from increased volatility. For example, they might purchase straddles on exchange-traded funds such as SPY or QQQ before the deadlines. This allows them to profit from significant price movements in either direction. Alternatively, for those who expect a downturn, buying puts on multinational industrial companies sensitive to trade flows could be a focused strategy. Create your live VT Markets account and start trading now.

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