The US Trade Representative, Greer, plans to keep working on various trade issues, such as steel and digital services taxes. There is hope for positive developments with China, but significant breakthroughs are not expected in the near future. Current agreements will be closely monitored, and while there is interest in a meeting between Trump and Xi, there’s no rush to finalize deals. As for India, more negotiations are needed, and discussions with partners are ongoing. Recently, the markets reacted to the US-EU trade deal, anticipating a 15% tariff based on reports from last week. It’s expected that tariffs will range between 10-20%, similar to the situation with China. Deadlines are likely to be pushed back to allow for further negotiations.

Options Strategy Considerations

From the trade representative’s comments, we see a trend of long negotiations with no major changes. This suggests that implied volatility in equity index options will likely stay low, but there’s a chance of sudden spikes from unexpected news. Therefore, we should explore strategies that take advantage of this situation, instead of making large bets on the overall market. With deadlines possibly extended, we can expect time decay to play a big role in options pricing. Strategies like selling iron condors on major indices, such as the S&P 500, could be beneficial as they profit from a stable market. This method aligns with the “more talk, less action” sentiment reflected in recent comments. The mention of progress on EU auto standards is important, especially since the EU sent over 1.1 million passenger vehicles to the U.S. in 2023. A 10-20% tariff would significantly impact this, so we should be ready for fluctuations in European automaker stocks and related currency pairs like EUR/USD. Positive news in this area could give a temporary boost to that sector.

China and Market Stability

The desire for a meeting between the two leaders suggests a level of stability in the market, preventing a total breakdown in relations for now. Despite existing tensions, U.S. imports from China were over $427 billion in 2023, showing the strong economic ties that both sides are careful not to break. This indicates a tense but steady trading range. The trade war of 2018-2019 taught us that markets react quickly to tariff news, but usually recover as negotiations progress. The CBOE Volatility Index (VIX) is currently in a calm 13-15 range, making it a good time to buy tail-risk hedges. Purchasing far out-of-the-money puts could be a cost-effective way to shield portfolios from sudden market changes. Ultimately, trade policy is connected to inflationary pressures. The latest U.S. Consumer Price Index shows core inflation is above the Federal Reserve’s target, meaning new tariffs could complicate the central bank’s decisions. Traders should pay attention to how new tariffs might affect both interest rate expectations and equity markets. Create your live VT Markets account and start trading now.

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