US Treasury Secretary Scott Bessent remarked that China intends to set up new trade barriers. He emphasised that the US does not wish to escalate tensions and doesn’t seek a separation from China.
Bessent mentioned that the US holds leverage through its supply of semiconductors, aircraft engines, and minerals vital for China’s supply chain. The US aims to revive five to seven key industries, including shipbuilding and rare earths.
Efforts To Engage
Efforts to engage with Chinese officials are underway, with plans for a potential meeting between President Trump and Xi Jinping. This relationship is considered a factor in preventing further escalation.
Bessent noted that the stock market fluctuations will not impact trade negotiations with China. He also pointed out the need for industrial policy when dealing with non-market economies like China.
Following Bessent’s statements, the US Dollar Index showed a moderate recovery, though it registered a 0.07% decline on the day, settling at 98.96.
The mixed signals from the Treasury, promising both toughness and continued engagement, point toward higher market volatility in the coming weeks. We are hearing that while we don’t want to decouple, there are many levers that can be pulled against China. This uncertainty means traders should consider buying protection, especially as the CBOE Volatility Index (VIX) has been elevated, climbing over 15% in the last month to trade above 19.
Market Reactions
The direct statement that the stock market will not affect negotiations is a clear warning for anyone with long equity exposure. This suggests the administration is willing to tolerate market downturns to achieve its trade policy goals. Therefore, using put options on major indices like the S&P 500 and Nasdaq 100 to hedge portfolios is a prudent strategy.
Specific sectors are being singled out, creating clear winners and losers. We see semiconductors and aircraft engines being used as leverage, which could put downside pressure on related stocks like those in the SOXX ETF, which has already underperformed the broader market by 6% this quarter. On the other hand, derivative plays on domestic companies in shipbuilding and rare earths could benefit from the stated goal of bringing those industries back.
In currency markets, this rhetoric supports a stronger US Dollar, which we see reflected in the DXY’s position near 99.00. We should expect this to put further pressure on the Chinese Yuan, with the USD/CNH pair having recently pushed past the psychologically important 7.45 level for the first time this year. This may also create weakness in currencies sensitive to Chinese economic health, such as the Australian Dollar.
Looking at this from our perspective in October 2025, the current dynamic echoes the headline-driven market we experienced during the 2018-2019 trade disputes. Back then, markets swung wildly based on negotiation updates and presidential tweets. Traders should prepare for a similar environment, keeping positions nimble to react to sudden policy shifts or developments from the planned meeting between the two presidents.
