Economic Impacts of Tariffs

The Dow Jones Industrial Average rose slightly after a tough start for US markets. China has enforced strict licensing for the export of rare earth minerals, leading US President Donald Trump to impose trade tariffs in response. Additionally, China raised port fees, increasing global trade worries as US job numbers decline. Initially, the Dow fell to around 45,450 but later recovered to reach 46,500 when US markets reopened after a long weekend. The Trump administration warned of new tariffs on Chinese goods, starting November 1, unless China changes its policies. China’s restrictions on rare earth exports could threaten vital US industries, like technology and defense. Citigroup and Wells Fargo had better-than-expected earnings, which helped the market. However, a government shutdown has stalled the release of important US economic data. Tariffs, placed at entry ports, aim to boost local goods’ competitiveness against imports. Economists are divided on the effectiveness of tariffs, noting they could lead to price increases and trade wars. Donald Trump intends to use tariffs to support the US economy, focusing on trade partners Mexico, China, and Canada. He plans to use the revenue from tariffs to lower personal income taxes. The mix of positive earnings and geopolitical tensions is causing market volatility. The Dow Jones Industrial Average has fluctuated over 1,000 points in just one day. We believe the CBOE Volatility Index (VIX) is crucial to watch. As the VIX, currently around 22, is likely to rise with the November 1 tariff deadline approaching, we plan to buy VIX futures or call options.

Trading Strategies in Uncertainty

We are seeing a situation similar to the tariff-related market swings of 2018-2019. During that time, the VIX surged over 30 due to tariff disputes, impacting unprepared traders. Reports, including one from the Congressional Budget Office in 2019, indicated that such tariffs hindered US GDP and business investment. In light of China’s recent restrictions on rare earth minerals, we’re considering bearish positions in sectors that could be heavily affected. Technology and defense are particularly at risk, with the iShares Semiconductor ETF (SOXX) already showing strain, falling 1.5% last week. Buying put options on ETFs like SOXX or the VanEck Rare Earth/Strategic Metals ETF (REMX) could be a wise way to hedge against further escalations. Conversely, strong earnings from Citigroup and Wells Fargo suggest the banking sector might be less impacted by immediate tariff effects. We are carefully watching for upcoming reports from other major financial institutions to verify this trend, possibly using call options on the Financial Select Sector SPDR Fund (XLF). This earnings strength is currently helping to prevent a sharp market decline. The ongoing government shutdown creates an information gap, leaving us without key data like the Producer Price Index and Retail Sales figures. We now need to depend more on corporate earnings and announcements from the administration, which may make the market react strongly to single news events. This uncertainty supports the use of options strategies, such as straddles on the SPY, to benefit from significant price movements in either direction. Create your live VT Markets account and start trading now.

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