On Wednesday, January 15, a historic event took place, which was the signing by the United States and China of the phase one of the trade agreement, which in turn is intended to ease the trade war between USA and China. Signing the agreement seems to reduce fear in the markets. What could this mean for investors?
A document was signed yesterday in Washington, which shows that China has agreed to import more goods from the United States. President Donald Trump announced that Beijing has agreed to buy US goods well above $ 200 billion over the next two years. However, the United States will maintain its tariffs on Chinese goods until agreement is reached in phase two to secure a good negotiating position. The United States, however, has declared that it will not impose part of further retaliatory tariffs on Chinese products. The agreement is expected to come into force 30 days after its signing, and the United States is expected to have at least 10 months to verify the effectiveness of the agreement. It seems that only then will it be possible to talk about the next step, i.e. the phase two of the trade agreement, which Donald Trump is to negotiate in Beijing. It could be the last part of the negotiations. Nevertheless, it seems that this would only happen after the presidential elections in the US, which are scheduled for November.
Markets reacted optimistically to the agreement signed, and on Wall Street we again observed historical records. We’re talking about the Dow Jones Industrial Average index (US30 on the Conotoxia trading platform) and S&P 500 (US500 on the Conotoxia trading platform). Along with the passage of another risk factor, fear in markets has decreased, which can be determined by the expected volatility from the options market. Both so-called the VIX fear index as well as the VIX contracts fell to 12.75 points, which is close to the December 2018 low, and the implied volatility for the USD/JPY pair fell to the lowest level in history.We’re talking about implied volatility for 1-year options for USD/JPY pair. It fell for the ninth day in a row to the never seen before level of 6.14.
The market may need new, larger stimuli to create new major trends, and these may usually appear unexpectedly. Low volatility may dull the vigilance of many investors who, for example, do not remember what happened in the markets during the financial crisis over a decade ago. It is worth remembering that after periods of high volatility comes a time of calming down, and after periods of low volatility, there may come a time of its increase.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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