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Covered Call Stories – Rhetoric, Reality and Volatility

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BY: HANS ALBRECHT, CIM®, FCSI®, VICE-PRESIDENT, PORTFOLIO MANAGER AND OPTIONS STRATEGIST, HORIZONS ETFS

China’s economic growth recently slowed to its weakest pace since the first quarter of 2009. President Trump sure knows how to whip his rally attendees into fervour, but he really isn’t helping their cause much.

High tariffs are going to cost soybean growers massively in Iowa, a state that overwhelmingly voted for him. Rhetoric and reality – one gets ratings and votes, the other describes people who are ironically voting against their own interests. China, the world’s biggest buyer of soybeans, will turn to countries like Brazil for part of their supply. This kind of thing has the potential to disrupt a world economy that has already become fragile and too reliant on the U.S.

Do tariffs take long to kick in? In fact, the effects are swift. USD $250 billion in Chinese imports have immediately had 10% to 25% tariffs imposed on them. Soybean exports have stopped on a dime for U.S. exporters. We may see the effects of tariffs creep in very quickly to S&P 500 earnings – and that is (in part) what’s worrying markets. Damage is being done to important world economies at a time when stimulus is going in opposite directions for large central banks. Europe is now on hold as Italian and Brexit issues play out, China’s economy is slowing and U.S./China relations are weakening as the U.S. and Canada remain hawkish.

I wouldn’t want to bet against the temporary cheer that Hanukah and Christmas usually bring to end-of-year markets. But serious issues are here to stay. All is not well, and the sooner powerful people realize it, the better. The ‘Art of the Deal’ technique may not work as well as one might hope on massive superpowers that prize pride as much as money. 

This isn’t the China of 20 years ago – the Chinese economy has grown much more quickly than that of the U.S. in the past 15 years. Because it wields much more power, the bully needs to realize that the victim isn’t going to stand for it. The playground has changed, so it’s time to play more nicely. A continuing ‘doctrine of patriotism’ may have the U.S. losing a great deal, and the world economy and equity markets may not be able to handle it right now.

The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

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