The US has paused export restrictions on key technology to China to improve trade relations. This decision is aimed at setting up a meeting between Trump and Xi later this year. The commerce department has been told to avoid strict actions against China. China’s past use of rare earth exports for leverage in May has influenced this decision. However, it remains uncertain if this will lead to meaningful discussions between Trump and Xi.

US-China Temporary Truce

The US and China seem to have reached a temporary truce that may be extended, although no significant agreements are expected. The priority now is to maintain friendly relations between the two countries. With the recent pause in export controls, traders should expect lower market volatility. This truce reduces the risk of sudden market shocks caused by policy changes, which have previously unsettled investors. For example, during the trade war escalation in mid-2019, the VIX volatility index surged above 20, whereas it currently remains low at around 13, indicating a stable environment. This situation is beneficial for technology and semiconductor stocks that are heavily invested in the Chinese market. Companies like Qualcomm, which gets over 60% of its revenue from China, are good candidates for bullish strategies, such as buying call options or selling cash-secured puts. The removal of immediate threats should boost their stock values in the short term. On the other hand, China’s rare earth leverage could serve as a challenge for producers outside of China. We anticipate less investor interest in mining companies that previously gained from supply chain diversification narratives. In this context, buying put options on specific mining ETFs or stocks may be a useful strategy to hedge against broader market optimism.

Caution on Temporary Fix

While this effort to maintain friendly relations is welcome, it should be approached with caution, as it seems like a temporary solution. Despite the positive news, US goods trade with China dropped by over $70 billion in 2023, indicating a longer-term shift in strategy. Therefore, any optimistic derivative trades should be focused on the short term, as the underlying issues between the two nations are still unresolved and simply postponed. Create your live VT Markets account and start trading now.

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