The US and China will have trade talks in the next two to three months to discuss their economic ties. This comes after they agreed to extend a temporary truce on tariffs for 90 days, which means they will not raise import taxes on each other’s products. Chinese President Xi Jinping has invited Donald Trump to meet, but Trump has not accepted the invitation or set a date. However, he has shown he may be open to a meeting with Xi by the end of the year if they reach a trade agreement.

Fentanyl Issue Remains

The US is determined to keep tariffs in place until China shows real progress in reducing fentanyl exports. The US claims that China hasn’t done enough to limit these exports, which China disputes. Tariffs of 20% from February and an additional 10% remain in effect, despite the truce. US Treasury Secretary Scott Bessent has proposed a 0.5% interest rate cut in September to address domestic economic issues. With US and Chinese officials set to meet soon, we expect that market volatility will increase. The VIX, a key measure of market fear, is currently around 14. However, it soared above 20 during previous trade tensions in late 2023. This indicates that buying options now could be a strategic move to prepare for potential price changes. The Treasury Secretary’s suggestion for a half-point rate cut adds complexity, which could briefly boost stocks. Currently, there is a 75% likelihood of at least a quarter-point cut, especially after the July jobs report showed slow wage growth. While a rate cut could support the market, the ongoing uncertainty over tariffs may lessen the positive impact.

Trade Strategies to Consider

Given the mixed signals, traders might consider strategies that benefit from significant price movements, such as a long straddle on the SPY or QQQ ETFs. Specific sectors, especially semiconductors and heavy industries, are likely to be impacted by news from the talks. Companies like Caterpillar and Nvidia reacted dramatically to tariff news from 2022 to 2024, and we expect a similar trend. The fentanyl issue remains a major long-term challenge, making an immediate resolution on tariffs unlikely. The US has indicated that tariffs may last for months or even a year until clear progress is made, which is a subjective measure. This means that any market rally from positive meeting news could be short-lived, creating a chance to buy puts on broad indices after an initial price surge. We are also closely monitoring movements in currencies and commodities. The Chinese Yuan, currently fluctuating around 7.30 to the dollar, will be a key indicator of how the trade talks are going. A significant move in either direction could impact global markets, making options on currency ETFs like CYB a direct way to take advantage of the outcome. Create your live VT Markets account and start trading now.

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