The U.S. and China have restarted trade talks in Madrid, focusing on TikTok, tariffs, and other economic issues. Key participants include Treasury Secretary Scott Bessent and Vice Premier He Lifeng, with more discussions planned. China has reported a drop in home prices for both new and existing homes for August. Industrial production, retail sales, and fixed-asset investment also fell short of expectations compared to July. Officials cited a “very severe” external environment, indicating that policy measures may be coming to support the economy.

Market Response

In the markets, major currency pairs remained stable, with slight gains for AUD/USD and NZD/USD. Japanese markets were closed, resulting in little impact on U.S. Treasury trading. Chinese stocks increased slightly, lifted by gains in chipmakers following an investigation into U.S. semiconductors. Tesla announced it will boost production at its German factory in the second half of the year due to unexpected demand. Plant manager André Thierig confirmed these production adjustments, reflecting strong market expectations. Stocks in the Asia-Pacific region produced mixed results: the Hang Seng rose by 0.46%, the Shanghai Composite gained 0.15%, while Australia’s S&P/ASX 200 fell by 0.26%. Japan was closed.

Economic Data and Policy Implications

The disappointing economic data from China suggests that we should expect further easing of policies from Beijing. With Q2 2025 GDP growth already low at 3.2%, the new figures showing declines in industrial production make action by the central bank more likely. We are considering options strategies to benefit from a weaker yuan, such as purchasing U.S. dollar to offshore yuan (USD/CNH) call options. The Australian dollar’s strength appears vulnerable in light of the news, presenting a potential shorting opportunity. The AUD/USD often reflects China’s economic health, and its current resilience seems out of sync with poor housing and investment figures. We are looking at buying put options on the Australian dollar, expecting that hopes for stimulus will fade and that lower commodity demand will become apparent. The ongoing U.S.-China trade discussions introduce considerable uncertainty, leading to higher market volatility. We recall the significant market shifts seen during the trade disputes of 2018-2019, where headlines triggered swift reactions. Buying straddles on equities sensitive to China could be a wise strategy to benefit from potential large price movements in either direction. The anti-dumping investigation into U.S. semiconductors represents a clear sector-based trade. This policy supports domestic Chinese chipmakers against their U.S. competitors. We are considering buying put options on U.S. semiconductor ETFs while looking at call options for key Chinese tech stocks that will benefit from this protectionism. The good news from Tesla in Germany sharply contrasts with the negativity in Asia, highlighting a growing economic divergence. This leads us to believe that investing in European equities over Asian ones could be a profitable strategy. We may express this by selling Hang Seng index futures while buying futures for Germany’s DAX index. Create your live VT Markets account and start trading now.

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