Recent trade deals between the US and Japan, along with a framework agreement with the EU, have eased concerns about US trade policy. Japan’s Chief Cabinet Secretary, Hayashi, thinks this reduction in uncertainty could lower the chances of US trade policies impacting Japan and the global economy. Last week, the US and Japan reached a trade deal, and over the weekend, the US and EU completed their framework agreement. These advancements are happening alongside other significant global economic updates.

Global Economic Updates

If the Federal Reserve lowers interest rates to 1%, it might cause long-term rates to rise. China is also planning to create a unified power market by the end of the year, and Australia is expecting important inflation data that may influence the outlook of the Reserve Bank of Australia. Today, the People’s Bank of China set the USD/CNY reference rate at 7.1467, slightly under the estimate of 7.1653. In other news, Samsung secured a $16.5 billion contract to supply semiconductors to a major global company. According to Reuters, the People’s Bank of China is likely to set the USD/CNY reference rate at 7.1653. We view these recent trade agreements as a strong indicator of decreased geopolitical tension, which aligns with Mr. Hayashi’s perspective. This reduction in uncertainty should lead to a more stable market, particularly by lowering market volatility.

Market Implications and Predictions

This decline in uncertainty is expected to lower implied volatility across various asset classes. The CBOE Volatility Index (VIX), known as the market’s “fear gauge,” is already trading below 14, which is notably below its long-term average of around 20. We believe this trend of lowered volatility will continue in the upcoming weeks. For those trading derivatives, this atmosphere makes it appealing to sell option premiums. We are exploring strategies that benefit from time decay and a further drop in implied volatility. As a result, trades like short strangles or iron condors on broad market indices are now more promising. With reduced “downward pressure,” we prefer selling out-of-the-money puts on major indices such as the S&P 500 or the Nikkei 225. The S&P 500 reached record highs in June, creating a favorable environment for these trades. This strategy allows us to earn premiums while anticipating market stability or continued upward movement. Historically, times of easing trade tensions have been beneficial for such strategies. For example, after the initial US-China “Phase One” trade deal in late 2019, the VIX declined and equity markets surged into early 2020. We expect a similar, if somewhat muted, trend now. In currency markets, we believe lowering trade risk will reduce volatility in pairs like USD/JPY. Implied volatility for this pair has already begun to drop from recent highs. This situation makes selling options on the currency pair an effective way to take advantage of a more stable foreign exchange market. The positive outlook is especially relevant for sectors like semiconductors, which are sensitive to global trade. Samsung’s recent major contract highlights the strong demand in this industry. We see potential in selling puts on semiconductor ETFs, like the VanEck Semiconductor ETF (SMH), which has risen over 50% year-to-date. Create your live VT Markets account and start trading now.

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