US Treasury Secretary Scott Bessent has highlighted concerns among Chinese leaders about the global response to their export controls. The permission issues surrounding this matter are now resolved, and a transaction is expected soon. China faced backlash for its actions regarding rare earth materials. However, an agreement has been reached that helps restore balance, though using critical minerals as a bargaining chip is not a sustainable strategy for China.

A New Agreement

A one-year deal has been finalized, which delays China’s rare earth export controls and includes significant US soybean purchases. This agreement also allows American control of TikTok in the US market. Both the US and China aim to sign this agreement within the week, expressing confidence in its durability despite their prior geopolitical tensions. This development marks a notable reduction in geopolitical tension, likely leading to a decrease in market volatility soon. We expect the VIX index, currently around 20 due to trade concerns, to fall to the mid-teens. This situation makes strategies like selling puts on strong companies more appealing, as premiums are relatively high right now.

Market Implications

The truce signals a positive outlook for equity markets, especially since the S&P 500 has been stable during most of October. Buying call options on major indices like the SPX and NDX could be a smart move to take advantage of a possible year-end rally. Historically, similar reductions in tension, like the one in early 2020, led to a market rally exceeding 10% in the subsequent quarter. For commodities, soybeans are directly affected, with futures expected to rise. China’s plan for “large amounts” of soybean purchases will increase demand, especially as recent USDA reports showed an unexpectedly strong US harvest, keeping prices low. This new demand could push prices back toward earlier highs this year. In the tech sector, TikTok’s resolution alleviates uncertainty for companies with significant exposure to the Chinese market. This is good news for semiconductor stocks and other large-cap tech companies that have been weighed down by concerns. We can anticipate increased interest in call options for the SMH semiconductor ETF as traders prepare for a relief rally. On the other hand, the delay in China’s rare earth export control is a setback for non-Chinese mining companies. Stocks that rose due to fears of supply shortages may see a sharp decline, suggesting we should consider buying put options on these specific miners. Conversely, EV and renewable energy companies will benefit from a more stable supply chain over the coming year. In the foreign exchange market, this agreement should strengthen the Chinese Yuan and other risk-sensitive currencies like the Australian Dollar, while the US Dollar, a safe-haven asset, is likely to weaken. We can take advantage of this by shorting the Dollar Index (DXY) or going long on the offshore Yuan (CNH) using futures. Create your live VT Markets account and start trading now.

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