Don’t buy the knee jerk President Trump denial of China trade deal failure. While the Chinese Yuan has stabilized in the past few days, the lack of Chinese follow-through on the deal these past 3 months should be enough to show that China will not comply. Why Peter Navarro’s statement should be a surprise or needs to be walked back by the President only confirms the importance of psychology to this economic recovery. The tenuous nature of this rally is becoming clearer as more data becomes available showing COVID-19’s first phase may not have a clear delineation before phase two starts in the fall. Can the global economy take a lingering COVID-19 presence and a US-China trade spat at the same time?
We also believe the administration’s efforts to talk down the US Dollar may become more actively managed as it would improve the President’s reelection hopes if the Chinese are strong armed into complying. By reducing the potential of a weakening Yuan on Chinese trade, the administration could gain leverage as China tries to sell its post COVID-19 supply ramp up. The market may have been sensing this stress as on the risk management side both the VIX and the CBOE Implied Correlation Index have outperformed equities meaningfully (15.5% and 9.8% vs S&P up ~2.5% for the month). Our multi-asset safety asset basket is flat on the month after having been down ~1% 2 weeks ago. To us, the data shows legitimate vulnerability in risk assets.
iShares MSCI Emerging Markets Index (EEM)
EEM put strategies make sense in a trade war renewal. EEM 2m IV is in its 76th percentile and 13% cheap to forecast. 2m Skew is 1.64 standard deviations over its mean.
SPDR Gold Trust (GLD)
GLD call strategies respond well to the combination of geopolitical stress and economic concern. GLD 2m IV is in its 76th percentile and 25% expensive to forecast. 2m Skew is 0.84 standard deviations over its mean.
SPDR S&P Metals and Mining (XME)
XME put strategies are worth watching as any global economic muting trade spat could meaningfully drop metals and energy prices. XME 2m IV is in its 77th percentile and 22% cheap to forecast. 2m Skew is 1.17 standard deviations over its mean