US car manufacturers are worried about a new trade agreement with Japan. While it lowers tariffs on some Japanese imports, it doesn’t reduce tariffs on Japanese cars made in North America. Currently, US automakers are facing various tariffs from the Trump administration. These include 50% tariffs on steel, aluminum, and copper, and 25% tariffs on imports from Canada and Mexico.

Tariff Disparities Impact

Japan has a 15% tariff, which many see as unfair to the US automotive industry. This difference in tariffs creates an uneven competition for US automakers. The concerns from major US automakers indicate potential declines in their stock prices. This trade deal seems to create an unfair environment, possibly harming local profit margins that are already low. We expect to see more negative feelings toward these companies in the coming weeks. In response, we are thinking about protective strategies, such as buying put options for the US auto manufacturers that are most at risk. Recent data from Cox Automotive shows that the new-vehicle market is slowing down after a peak in the spring, with high interest rates affecting consumers. The added competition from this deal could make things worse for domestic auto stocks. On the other hand, Japanese companies might benefit. For example, Toyota just reported a 14.2% increase in sales for May 2024 in North America, showing strong performance. We’re looking at call options for these foreign firms, expecting they will gain market share and see their values rise.

Market Volatility And Trade Policy

Major changes in trade policy have historically led to market volatility, and we think this will be the case again. During the tariff increases in 2018, the CBOE Volatility Index (VIX) frequently climbed above 25, signaling widespread uncertainty. We’re anticipating bigger-than-usual price swings across the automotive sector ETF (CARZ). The ongoing issue of high costs from tariffs on metals and parts from Canada and Mexico remains a significant challenge. These high expenses have been a recurring theme in quarterly earnings for US car companies. This new deal does not solve that core problem, reinforcing our negative short-term outlook on their profitability. Create your live VT Markets account and start trading now.

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