US Treasury Secretary Scott Bessent stated that China plans to introduce new trade barriers. He stressed that the US does not want to escalate tensions or separate from China. Bessent highlighted that the US has advantages due to its supply of semiconductors, aircraft engines, and essential minerals for China’s supply chain. The goal is to revitalize five to seven key industries, including shipbuilding and rare earths.

Efforts to Engage

There are ongoing efforts to connect with Chinese officials, including a possible meeting between President Trump and Xi Jinping. This relationship is seen as crucial in avoiding further escalation. Bessent mentioned that stock market changes will not affect trade talks with China. He also pointed out the need for a clear industrial policy when dealing with non-market economies like China. After Bessent’s comments, the US Dollar Index slightly recovered but still fell 0.07% for the day, ending at 98.96. The mixed signals from the Treasury, balancing toughness with a willingness to engage, suggest that market volatility may rise in the coming weeks. While there is no intention to decouple from China, there are various measures that can be taken. This uncertainty prompts traders to consider buying protection, especially since the CBOE Volatility Index (VIX) has increased by over 15% in the last month, trading above 19.

Market Reactions

Bessent’s clear statement that stock market performance won’t influence negotiations serves as a warning to long equity investors. This indicates that the administration is prepared to accept market declines to achieve its trade policy objectives. Thus, using put options on key indices like the S&P 500 and Nasdaq 100 to protect portfolios is a wise move. Certain sectors are being highlighted, leading to distinct winners and losers. Semiconductors and aircraft engines are being leveraged, possibly putting downward pressure on related stocks like those in the SOXX ETF, which has already lagged the broader market by 6% this quarter. In contrast, investments in domestic companies involved in shipbuilding and rare earths may benefit from efforts to boost those industries. In the currency markets, this stance supports a stronger US Dollar, evident in the DXY hovering around 99.00. This is likely to put further strain on the Chinese Yuan, with the USD/CNH recently crossing the significant 7.45 mark for the first time this year. We may also see weakness in currencies sensitive to China’s economic performance, such as the Australian Dollar. Reflecting on this from October 2025, the current situation resembles the headline-driven market fluctuations we witnessed during the 2018-2019 trade disputes. At that time, markets reacted strongly to negotiation news and presidential tweets. Traders should be prepared for a similar environment and stay flexible to adjust to sudden changes in policy or developments from the planned meeting between the two presidents. Create your live VT Markets account and start trading now.

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