Trump’s Trade War: As Options Traders Bank on Volatility, Asia Braces for a Storm
President Donald Trump’s proverbial trade war with China could have far-reaching effects as the new tariffs take hold. With the US now applying additional charges to $34 billion worth of Chinese imports, the Trump administration’s counterparts have responded in kind with their own tariffs. For many, the July 6, 2018 changes are the start of a potentially destructive tit-for-tat battle that could impact Asia as a whole. As they often do, the financial markets have reacted with price fluctuations for a myriad of commodities and stocks. From soy beans and coal to shares in major companies in both countries, the effects of the trade war are already hitting investors.
A Time for Options Traders to Invest
For options traders, a volatile market is a blessing in disguise. But what is options trading on commodities and stocks? It’s buying or selling assets based on a future price. When otherwise stable markets become volatile, traders looking to make a quick buck are often quick to invest. With the US and China typically standing strong as stable economies, the margins on import and export assets is usually fairly low. However, with Trump’s tariffs destabilizing the status quo and spooking businesses, prices now have the potential to vary wildly. Anyone with an interest in options trading now has the ability to capitalize on these unexpected fluctuations and cash in before harmony is restored.
However, when and, indeed, if harmony will be restored is unclear. While that may be good news for traders, it could spell disaster for business owners, consumers and, in turn, economies that rely on the US and China.
“Across Asia, there is a deep regional value chain […] So, trade tensions between the U.S. and China will have a spillover effect through this value chain,” Asian Development Bank’s Cyn-Young Park told CNBC in May.
Tariffs Threaten to Strangle the Asian Supply Line
At the heart of the problem is the Asian production line. Although China heads goods exports to the West, it’s a head served by a network of intermediaries. In other words, countries across Asia are manufacturing semi-finished goods which are then sent to China. Once China’s businesses complete the chain, they sell them to the US et al and money trickles down. With Trump’s tariffs squeezing profits at the top, everyone further down the chain suffers. For Park, a meeting with local experts has identified a number of concerns. Assessing the data, the banker believes a 1% drop in China’s economic growth rate will reduce Asia’s financial status by 0.3%.
Of the countries currently eyeing up the trade war, the Philippines could be the most effected. As per the statistics from Malaysian bank RHB, 16.9% of exports from the Philippines go to China. If the new levies forces China to reduce trade with the US and slow production, it would impact almost one fifth of the Philippines’ GDP. For short-term options traders, the escalating tensions between the US and China could allow them to make hay while the sun isn’t shining. However, for Asia as a whole, the consequences could be dire.