President Trump shared that he had a productive phone call with Mexican President Claudia Sheinbaum, aimed at improving understanding between the two countries. The U.S. and Mexico have agreed to continue their current trade terms for another 90 days. This includes a 25% tariff on fentanyl and cars, and a 50% tariff on steel, aluminum, and copper. In addition, Mexico will immediately eliminate its non-tariff trade barriers. Both countries plan to work on a more comprehensive trade agreement during this period or afterward.

Details of the U.S.-Mexico Agreement

The call included key U.S. officials such as Vice President JD Vance, Treasury Secretary Scott Bessent, and Secretary of State Marco Rubio. Both nations also pledged to collaborate on border security, drug trafficking, and illegal immigration. This agreement is a short-term solution, with more extensive discussions expected to take place leading up to or beyond the August 1 deadline. The 90-day delay on significant trade changes provides a brief period of stability. This should reduce uncertainty in key sectors over the next few weeks and delay the threat of a trade war from the August 1 deadline. The auto sector, which depends on Mexico for about 40% of its parts, can now feel more secure. We expect stocks in companies like Ford and GM to rally soon, making short-term call options appealing. This relief follows months of concern, especially since trade in vehicles and parts surpassed $180 billion in 2024.

Implications of Tariffs on Steel and Aluminum

The continuation of the 50% tariff on steel and aluminum will support U.S. producers like U.S. Steel and Cleveland-Cliffs, helping their stock prices remain stable. However, these high tariffs could be used as negotiation tools that might disappear, posing risks three months from now. With Mexico removing non-tariff barriers and extending the deal, the peso may strengthen against the dollar in the short term. Yet, we recall the significant fluctuations in the USD/MXN exchange rate during the 2017-2018 USMCA talks, so this stability is not guaranteed. True volatility may return as the 90-day deadline nears in late October. The best approach is to keep an eye on the October deadline and prepare for potential volatility in contracts expiring in late October and November. Purchasing straddles or strangles on ETFs like XME (metals) or the peso (through PEX) may yield returns, as either a final agreement or a breakdown could trigger a major market move. For the broader market, we anticipate the VIX to decrease from recent highs as this risk is temporarily set aside. This presents an opportunity to buy cheaper, long-term VIX call options, essentially betting on a resurgence of market anxiety. While the market enjoys a summer lull, tensions are likely to rise again in the fall during crucial trade negotiations. Create your live VT Markets account and start trading now.

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