China’s Commerce Minister had a video call with the European Union’s trade chief. They discussed trade cooperation and the ongoing tensions between them. A key topic was the EU’s sanctions on Chinese companies. This led China to formally protest during their talks. Both sides acknowledged the importance of continued economic collaboration, yet the situation highlighted growing trade tensions.

Market Volatility and Investment Strategy

We see the “solemn representations” from these talks as a sign of rising geopolitical risks that may cause volatility in European markets. This uncertainty makes it wise to consider buying protection or speculating on price movements. Traders might look into purchasing call options on European volatility indices like the VSTOXX, which is currently trading at historically low levels around 13. This makes it an affordable hedge against a sudden market downturn. The protest from China’s Commerce Minister threatens European sectors with significant revenue ties to China. German automakers, for instance, relied on the Chinese market for over 35% of their sales in 2023. French luxury brands are also at risk of retaliatory actions. We see an opportunity to buy put options on indices like Germany’s DAX or on ETFs that track the European luxury sector. In the past, trade frictions, like the U.S.-China trade war that escalated in 2018, caused sharp market fluctuations related to news headlines. This history indicates that selling short-dated, out-of-the-money call and put options (known as a short strangle) on stocks with high exposure could be profitable. This strategy takes advantage of high option premiums and bets that stocks will stay within a certain range as long as tensions remain unresolved.

Currency Market Impacts

These trade tensions will likely impact currency markets, especially considering the vast EU-China trade, which exceeded €730 billion last year. If the dispute escalates, the discussions by the EU’s trade chief could put downward pressure on the Euro, as forecasts for economic growth may be reduced. Therefore, traders could consider using futures to short the Euro against safer-haven currencies or use options to anticipate a wider trading range for the EUR/USD pair in the coming weeks. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now