Options Imply U.S. May Struggle To Win Trade War With China


  • Time may be on the side of China, which could be less inclined to reach a speedy accord to end its long-running trade dispute with the U.S.
  • Beijing has a number of countermeasures, including fiscal and monetary stimulus, to help cope with any negative effects from tariffs, options that the U.S. likely lacks.
  • China may also stop buying Treasuries, or even sell them to finance fiscal spending, a further potential blow to the U.S.
  • Higher tariffs for longer creates headwinds for U.S. equities, something President Donald Trump wants to avoid as he prepares his re-election bid.

By Ashwin Alankar

Chinese President Xi Jinping has more tools at his disposal than his American counterpart, Donald Trump, to deal with the potential negative effects of tariffs, say Myron Scholes and Ash Alankar of the Janus Henderson Adaptive Asset Allocation Team.

U.S. President Donald Trump underestimated Chinese President Xi Jinping's resolve when he raised tariffs on about $200 billion of imports from China to 25% from 10%, warning his counterpart not to respond in kind. That advice was ignored.

Trump's action and China's response - imposing duties on about $60 billion of U.S. exports to take the total of affected products to $110 billion - led to a 2.41% slide in the S&P 500® Index on May 13, its biggest drop since Jan. 3. In combination with a drop in the yield on 10-year Treasuries to about their lowest since 2017, the clear conclusion is that investors are nervous about the impact that the latest tit-for-tat salvos in the long-running trade dispute will have on U.S. economic growth.

Investors are right to be nervous. Even though tariffs hurt China more, due to its $379 billion trade surplus with the U.S. in 2018, it doesn't necessarily mean Beijing is hamstrung. It may actually be able to ride out the storm longer than many think.

Options Favor Chinese Equities

Options prices, which can provide important insights into shifting near-term market risks, suggest that Trump may have picked a fight he has a diminishing chance of winning. For the S&P 500 and other U.S. equities, the ratio of the expected upside (as implied by call options prices) over the expected downside (gleaned from put prices) has declined sharply in recent days. As a result, U.S. equities are among the least attractive of all developed market stocks and less attractive than both Shanghai Stock Exchange A Shares and Hong Kong Stock Exchange H Shares.

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