A US trade delegation has arrived in Stockholm to meet with China. The goal is to keep current tariff levels and get ready for a possible Trump-Xi summit later this year. Treasury Secretary Bessent and USTR Greer are leading the talks, with China’s Vice Premier He Lifeng participating. The discussions will cover key topics like market access, industrial overcapacity, and trade issues related to fentanyl. Though no big agreements are expected, both sides hope to create a limited deal. This might include China taking steps regarding fentanyl and making future investment commitments, which could lead to some tariff reductions. ### Broader Deal Uncertainty Even with these discussions, a larger agreement is uncertain. Beijing might want some concessions from the US about military presence and technology export controls. We see these talks as a reminder to keep expectations in check for immediate market changes. The CBOE Volatility Index (VIX) has been trading below 15, a historically low level, meaning markets aren’t expecting a significant trade shock. Thus, we believe there’s no need to invest in costly short-term protection or make large bets based solely on this meeting. The outlook for a small agreement rather than a breakdown suggests that implied volatility in certain areas may be a bit high. We think this presents a chance to sell options, like covered calls on current holdings in ETFs that track Chinese stocks, to earn premium. This strategy benefits from the expected stable market while these important talks continue between Mr. Greer and Mr. He. ### Industrial Overcapacity and Market Strategy The emphasis on industrial overcapacity is very relevant now, given the recent mixed signals from China’s economy. For example, while exports have remained strong, China’s official manufacturing PMI dropped back to 49.5 in May 2024, signaling internal challenges. We should be cautious about any bullish bets on Chinese industrial companies until we have clearer information on market access. Unlike the trade war in 2018-2019, which caused sharp and unpredictable market fluctuations, this dialogue seems more restrained and focused on reducing tensions. The groundwork for a potential summit later this year indicates that any significant policy changes and the resulting market volatility are likely still months away. Therefore, we should think about longer-term options that can take advantage of potential market moves later this year instead of focusing on immediate weekly expirations. Create your live VT Markets account and start trading now.

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