Whether the U.S. and China will make meaningful progress over dinner at the G-20 meeting this weekend is anybody's guess.
As U.S. stocks have risen this week, retail investors have been hedging their bets ahead of the meeting.
"Some people are going to be hedging positions to protect themselves from the downside if there is no positive conclusion from those talks," Chris Larkin, svp of trading at E*Trade told TheStreet. "People are making strategic decisions for a short period of time using the options market."
The G20 summit will be held in Bueno Aires. It will begin Friday evening Nov. 30 and end on Saturday Dec 1. Trump and Xi are expected to meet separately on Saturday to discuss U.S. and Chinese trade relations.
Late Thursday, Katie Simpson, a senior reporter with CBC News, tweeted that a new NAFTA agreement will be signed Friday morning at the summit.
BREAKING: All three leaders of Canada, the US, and Mexico will sign new USMCA deal tomorrow at 9am local time tomorrow. EPN, Trump, and Trudeau will all take part.— Katie Simpson (@CBCKatie) November 29, 2018
Earlier on Thursday, President Trump on Thursday called off planned talks with Vladimir Putin, reportedly over tensions related to the Ukraine crisis.
German chancellor Angela Merkel's plane had to make an unexpected landing in Germany, so she'll miss the opening of the summit.
The S&P 500 is up 3.86% in the past five days, with the Dow Jones Industrial Average up 3.68% in that span. The market rallied Wednesday after Federal Reserve Chairman Jerome Powell came off as more dovish than expected, leading many investors to prepare for bad news after Presidents Trump and Xi Jinping meet. There are strong volumes of options trading, as investors are "putting up less capital to make certain directional bets," Larkin said, implying there could be healthy demand for call options, as investors don't want to commit too much capital ahead of the meeting.
There is growing uncertainty about trade progress. "There's certainly no guarantee that this is going to work," Craig Allen, president of the U.S. China Business Council told TheStreet.
"The best I can come out with is a 50-50 that we will have some form of a high-level agreement for a stand still of tariffs for progress," Allen said. So, even if there's progress on the intention to work collaboratively, the issues "can't be solved over dinner." Meanwhile, Trump indicated he may continue to play hard ball, saying earlier this week: "The only deal would be, China has to open up their country to competition from the United States."
Allen said he's hopeful the two sides reopen free trade in the information technology sector in particular. Semiconductor equipment coming into the U.S. from China has been subject to tariffs, forcing some chip makers to lift prices, which hurts demand. Those stocks have gotten hit hard partially on that development, down almost 10% in the past three months. Those stocks are now rebounding ahead of G-20, with the SPDR S&P Semiconductor ETF (XSD - Get Report) up 6% in the past five days. Nvidia Corp. (NVDA - Get Report) rose more than 7% in the past five days. Larkin says the bounce in semi stocks is mostly happening because those stocks were "oversold." Now investors may have to hedge against semis, as a sour G-20 meeting could put pressure on the sector.
Other companies that are "very concerned with the impact of tariffs," Larkin noted, are General Motors Company (GM - Get Report) , Ford Motor Company (F - Get Report) , Coca-Cola Co. (KO - Get Report) , and Walmart Inc. (WMT - Get Report) . GM, Ford and Coca-Cola all rely on buying steel and aluminum to make their products, which have been subject to tariffs as they come in from China. GM and Ford have both had to increase prices to maintain profit margins, which in turn hurts demand. GM is down 9.86% year-to-date, and Ford is down 24.66% year-to-date, but up 3.86% in the past five days. Believe it or not, both of those stocks could get hurt even more as Trump has said he could put place more tariffs on the auto industry.
For Coca-Cola, investors are positioning for an up move, buying call options against the stock. "KO, a consumer staple is seeing unusually high call volume," Larkin said, which of course means those investors can limit the amount of capital they risk on the stock.
Walmart has had to confront the tariff challenge, as some consumer goods now carry import duties.
China is prepared to absorb an intensified trade war, Allen said. He mentioned that since China has a controlled economy, meaning that the government has a lot of control, "they have lots of tools that they can take advantage of." China has also built up its foreign reserves, to the tune of more than $3 trillion. Also, "China's growth today is mostly domestic-demand driven," Allen said, making it less reliant on trade with the U.S.
Some experts are purely pessimistic. "It's easy to see why financial markets are optimistic that the G20 will herald a détente in the US-China trade war," said Govinda Finn, Japan and developed Asia economist at Aberdeen Standard Investments. "But it won't and they're wrong."