Investors grow anxious over Trump-Xi G20 meeting
Investors are placing bets on a surge in market volatility around the G20 summit next month, as US President Donald Trump and Chinese President Xi Jinping have downplayed the chances of a breakthrough in talks to resolve their trade dispute.
Bond yields have already plummeted, stock prices have fallen and the Vix index of market volatility has risen as hopes of a quick end to the dispute have been dashed. Investors are now using derivatives markets to position themselves for further turbulence at the two-day summit.
Trading data show that investors have piled into options contracts expiring on Friday, June 28, the first day of the summit in Osaka, Japan, which would offer protection if stock prices plunge.
There are now more than 450,000 outstanding “put” contracts expiring on that date, compared with the more normal levels of 6,000 two days earlier and 8,000 on the following Monday, according to data from Macro Risk Advisors.
The increased investor caution comes as 10-year US Treasury yields plunged to their lowest level in 20 months on Wednesday as fears over slowing global growth have intensified after trade talks between the US and China broke up in acrimony this month, leading to an escalation of tariffs.
Mr Trump said conversations between Washington and Beijing would continue and he would meet with Mr Xi at the G20.
That encounter is at most expected to result in a new truce, setting the stage for a further round of negotiations. Mr Trump this week said the US was “not ready” for a deal at this stage.
Steven Mnuchin, the US Treasury secretary, and Robert Lighthizer, US trade representative, had been indicating they would visit Beijing for talks before the G20, but no such plans have been made. If no truce is agreed at the G20, the US is expected to slap 25 per cent tariffs on a further $300bn of Chinese products, meaning all imports from the country would be subject to levies.
“The market is clearly pricing in risk around this event,” said Vinay Viswanathan, a derivatives strategist at Macro Risk Advisors. “If the US and China dialogue intensifies over the next few weeks it will only increase.”
Torsten Sløk, chief economist at Deutsche Bank Securities, said that investors were focusing on the G20 meeting as “the next milestone” in the trade dispute. “There is a feeling in many of my client conversations that we will know more after that,” he said.
Analysts noted that the increased trading activity around the meeting could come both from investors seeking protection from a sharp downturn in stock prices and from others betting that markets will remain calm and taking the other side of the trade.
“Some of it is hedging the event, and some of it is investors knowing other people will care about the event,” said Pravit Chintawongvanich, an equity derivatives strategist at Wells Fargo Securities. “The market is definitely starting to focus more on it and its potential impact on markets.”
Another metric also indicates the G20 has become a focal point for speculation on the next steps in the trade war.
The Vix index — sometimes called Wall Street’s fear gauge because it typically rises as stock prices fall — has been elevated in recent weeks as trade tensions have intensified, reaching 17.9 on Wednesday, but it has been below 15 for most of the year and is indicated to fall back from current levels.
That is not true for the period around the G20, however. The Vix level implied by prices of options expiring between June 28 and the following Friday currently stands at 17.6, compared with just 14.4 for the week after and 14.7 earlier in the month, according to data from Wells Fargo Securities.