How to trade the trade war
Head of Equity Strategy
Summary: The return of harsh tariff threats from Washington ahead of the expected arrival of a Chinese delegation this week has financial markets spooked, with a significant downside move probable if the VIX volatility index ticks past 22.
With historically high net short positioning in VIX futures (short volatility strategies), the market is set up for severe downside dynamics should the VIX take up the critical levels around 22 (the index stood at 17.40 ahead of today's New York bell). China’s trade negotiators are planned to arrive in Washington on Wednesday and it is very likely that Trump’s tweets are a negotiation tactic in order to press the Chinese for a trade deal sooner rather than later.But what's next for financial markets?
South Korea at odds with calm markets
We highlighted South Korea as one of the key countries to watch for clues as to where the economy is headed. The Organisation for Economic Co-operation and Development’s leading indicators are suggesting a turnaround, which could turn out to be false, and Samsung has recently sounded upbeat on demand for memory chips. The country’s exports to China have also improved considerably over the past couple of months, but is it merely set to stabilise at low-growth levels? The currency is sending a worrying signal (as it has all year, oddly), but today's price action indicates that investors are not fully buying into the 'China stabilisation' narrative just yet.
Either South Korean equities and KRW are mis-pricing risk and macro, or everyone else in global equities (mainly US equities) are wrong in terms of direction. We argued last week that investors should profit or hedge risk as we believed that equities were discounting an overly positive near-term future.
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