Latest out of China is that the trade war effects seem to be spilling over to the real economy. Exports slumped in December. The bad data should most likely increase the administration in China to reach a deal/ease the tariffs. At the same time, the rout in the financial markets should “motivate” the US to reach some sort of deal.
Interestingly enough, despite all the trade talks taking place between the US and China, we note that the 30-day correlation between the Eurostoxx 50 and the CSI 300 has shot up higher over past weeks and now trades at levels last seen in 2016 (our take on the Chinese equity markets remains the same, “they” need to kick start the speculation frenzy in order to boost the equity markets).
At the same time the 30-day correlation between the SPX and the CSI 300 remain rather “dull”.
Given the recent spike in correlation between the Eurostoxx 50 and the Chinese CSI 300, as well as the fact the V2X versus VIX ratio has been imploding, we ask ourselves why not hedge the Chinese trade war risk with European volatility?
The chart below shows the spread between VIX (orange) and the V2X (white) as well as the ratio (yellow).
Source: charts by Bloomberg
