The trade war continues but a worst-case scenario has been avoided, with the S&P 500 rising by 8% following a change in tariff strategy. Previously anticipated high tariffs were replaced by 10% across-the-board tariffs, alleviating some market concerns.
The market had expected 50% tariffs on China, resulting in a substantial 125% tariff that impacts imports. President Trump mentioned he was awaiting communication from China, suggesting potential for improvement, as additional tariffs do not affect cargo already en route.
Market Reaction To Tariff Changes
The future of the 10% tariffs remains uncertain, potentially serving as a negotiating floor or a permanent rate. Market movements show increased volatility, with the Nasdaq rising by 10% and a notable increase in the S&P 500, as shorts face significant losses.
What’s already been laid out is fairly clear in its implications. Broadly, markets had expected much worse — the dominant assumption being that tariffs could leap to truly destabilising levels. A 50% rate from the United States, matched in effect by corresponding measures from China, would have meant a trade barrier of 125% in total. That scenario didn’t unfold. Instead, Washington introduced a more measured 10% rate across all categories, which doesn’t fuel the same kind of fear in equity traders or macro funds. That softer approach has offered temporary breathing room.
As we’ve seen, this policy turn triggered a sharp reversal in sentiment, particularly among short sellers who were positioned for a deeper pullback. The S&P 500’s 8% rise reflects not just hope for recovery, but a forced unwind of those short trades. Alongside that, Nasdaq’s 10% jump points to an aggressive repositioning into tech-heavy names, many of which are sensitive to Chinese demand. Some market participants underestimated the risk of a softer tariff regime that still allowed certain bullish narratives to return.
Trump’s comments — that he is ‘awaiting communication’ from Beijing — suggest ongoing adjustment in policy based on diplomatic tone. For our part, we note that the latest tariffs won’t affect ships already in transit, which adds a layer of operational ambiguity for importers managing inventory costs and price expectations. It also means that current supply chain frictions could be delayed rather than removed, contributing to mixed signals from freight pricing and forward indicators like container bookings out of East Asia.
Impact On Trading And Hedging Strategies
What matters most for us now, though, is interpreting how compressed risk premiums can behave in an environment with intense policy-driven changes. Price action in the derivatives market, particularly volatility skew in index options and volume in short-dated puts, indicates increased hedging activity in the front of the curve. That’s to be expected. But we’ve also started noticing traders rolling hedges closer to spot, reducing reliance on month-end expiries.
That shift suggests they’re reserving flexibility for sudden news events, keeping dry powder for quicker reaction times rather than betting on medium-term trend continuation. Implied volatilities are telling their own story. While at-the-money options have normalised somewhat, wings remain wide. We, too, are tracking this; it’s a symptom of traders not trusting the calm.
Short selling, on the other hand, has become a tricky business recently. The sharp climbs in both the Nasdaq and the S&P pushed the most heavily shorted names up aggressively, triggering a squeeze that bled across sectors. Some funds had to reverse exposures within days. Derivatives flows mirrored this: call spreads got hit, and ETF options saw notable buying. This is no longer just about hedging losses — it’s also about not missing an upside reversal if talks begin to progress.
While there’s still uncertainty around whether the 10% tariff becomes a baseline for continued negotiation or holds steady for the long term, we are responding by watching relative moves between pricing of US indices and large-cap China proxies traded offshore. The spread between them is narrowing, not because confidence is returning, but because timing has become harder to gauge. Movement in futures volume confirms this: short-dated contracts continue to increase in size, reflecting a consensus shift toward faster execution and reduced confidence in weekly direction.
In the meantime, we’ll continue to monitor term structure flattening, particularly in index volatility. Past experience shows that these are moments where pricing can become temporarily inefficient. The challenge isn’t spotting the headline — it’s anticipating how positioning shifts in response to what could be genuine progress or another sudden pushback. Traders are no longer simply pricing tariffs. They’re pricing unpredictability. We have to adjust alongside that.
