Where the risk is

The implied volatility of the Asia Ex-Japan ETF (AAXJ) is substantially higher than the VIX or the implied volatility of the overall emerging markets index. That’s a big change from last January’s market crash, when both the VIX and EEM implied volatility were substantially higher than Asia ex-Japan volatility.

There were technical factors in the VIX surge of late January that exaggerated its movement, to be sure, but this shift suggests that the risk of trade war is an important factor in global market risk at the moment.

By far the most provocative measure adopted by the Trump Administration was the ban on chip sales to ZTE, which led China to adopt a crash program to produce its own high-end semiconductors. Now the US delegation in Beijing is asking China to give up its subsidies for “Made in China 2025” projects. China has indicated that it will do exactly the opposite. And it isn’t clear how the US delegation can walk this back.