How to Play the Volatility Surge Without Panicking - 10/19

Catalyst #1: The Trade War Heats Up Again

Trade tensions between the United States and China are once again front and center — and the rhetoric is intensifying.

According to CNBC, Treasury Secretary Scott Bessent is expected to meet with Chinese Vice Premier He Lifeng in an effort to revive stalled negotiations. But the tone from both sides has hardened in recent days.

President Donald Trump has threatened a 100% tariff on all goods imported from China, following Beijing’s decision to restrict exports of rare earth minerals — a key component in everything from EV batteries to smartphones.

He also threatened to ban Chinese cooking oil imports, a move seen as retaliation after China drastically cut back its purchases of U.S. soybeans.

Meanwhile, Capital Economics’ chief China economist, Zichun Huang, warned that the administration could tighten cross-border investment rules or even move to delist Chinese companies from U.S. exchanges — a move that would further rattle global investors.

The next flashpoint could come at the Asia-Pacific Economic Cooperation (APEC) forum later this month in South Korea, where Trump and Chinese President Xi Jinping are slated to meet. If that summit collapses or tensions escalate further, volatility could easily spike into the mid-30s or higher on the VIX.

For now, markets are holding their breath. But traders should be prepared for big moves in either direction.

Catalyst #2: A Government Shutdown With No End in Sight

The government shutdown has entered Day 17, and the stalemate in Congress shows no signs of ending soon.

The Senate recently failed — for the 10th time — to advance a Republican proposal to temporarily extend funding. The measure fell short of the 60 votes needed to proceed, with the final tally coming in at 51 to 45.

A separate bill to fund the U.S. military also failed to pass, despite bipartisan efforts to move it forward.

According to USA Today, every president in the past 50 years except George W. Bush and Joe Biden has endured at least one government shutdown. But the current one could be among the longest in American history if neither party budges.

House Speaker Mike Johnson warned, “We’re barreling toward one of the longest shutdowns in American history unless Democrats drop their partisan demands.”

The longer the impasse drags on, the more it threatens consumer confidence, government operations, and GDP growth — all of which can stoke further volatility.

While previous shutdowns have tended to resolve without long-term economic damage, short-term uncertainty often sends traders running for cover — which means another potential surge in the VIX.

Catalyst #3: Banks Wrestling With Bad and Fraudulent Loans

Adding to the turbulence, several regional banks are under pressure following disclosures of bad loans and alleged fraud.

Over the past few weeks, attention has turned to Jefferies Financial Group, which reportedly holds $45 million in exposure to First Brands, an auto-parts supplier that recently filed for bankruptcy.

Now, two regional lenders — Western Alliance Bancorp (WAL) and Zions Bancorp (ZION) — are also in the spotlight.

Both banks disclosed losses tied to loans made to companies they now claim defrauded them.

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  Zions Bancorp estimates it could lose $60 million as a result.

  
  


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  Western Alliance hasn’t disclosed its full exposure but has already filed a lawsuit against the borrower, alleging fraud.

  
  

These revelations come at a time when smaller financial institutions are already under scrutiny following last year’s regional banking crisis. Any sign of additional weakness — or contagion risk — could quickly amplify volatility across the financial sector.

As we’ve seen in past episodes, financial stress often acts as the spark that ignites broader market swings.