So, the US has fired the shot and people continue to point out how bad this is and how the sentiment of the Chinese stock market is spilling over globally.
Markets are always forward looking, so the shot itself is no news really. Shanghai Comp is down substantially over the past weeks and we are approaching very big levels. The index trades close to early 2016 levels which proved to be a very big support. This index has since the peak in 2015 fallen almost 50%.
My point is that the shot is already discounted. Will China collapse? Well, that nobody knows, but what we definitely know is the fact Shanghai and S&P 500 have gone separate ways lately.
Below is the spread between SPX (white) and Shanghai (orange). Note how far on the tail the spread actually trades.
Below is the same spread with the correlation chart added in the lower subchart. There is no correlation between S&P 500 and Shanghai.
A common tendency among investors is to get emotional as they read on hot topics such as the China Trade War situation. Getting fearful about China here is a late trade.
Not only has the Chinese stock market been a dog lately, volatility has also shot up substantially. Note the implied volatility chart (blue) and the fact it trades well above the 30 and 60 day historical volatility. Fear is already in the market and is no news really.
For more reading on options trading and volatility please visit our Derivatives section.
Source: charts by Bloomberg