MW Tariff shock ahead? This is the trade to make before the weekend headlines hit.

By Jamie Chisholm

Investors aren't sure if President Trump will formally apply import penalties or not

Get out the bunting. Invite the family around. February 1st is Tariff Day.

Well, it may be. On taking office this month, President Donald Trump launched a broad trade review - expected to conclude on April 1 - and said ahead of that the first day of February would see 25% tariffs on Mexico and Canada, and 10% tariffs on China.

Trump late Thursday reiterated his pledge to penalize the neighbors, causing the Canadian dollar $(USDCAD.FOREX)$ and Mexican peso $(USDMXN.FOREX)$ to weaken, and the S&P 500 SPX to fall.

However, the moves were swiftly pared, suggesting that while many investors don't like the idea of tariffs they are also not convinced the penalties will actually happen to any great extent.

Hopes remain that tariff threats are a negotiating tool, as was the case with recently persuading Colombia to accept U.S. deportation protocols.

Indeed, a survey undertaken by Evercore ISI (see chart below) shows investors are unsure whether formal tariffs will be announced this Saturday.

This means either outcome will be a surprise, says an Evercore team of strategists led by Julian Emanuel. And that could be a problem for a stock market that now has mostly shrugged off Monday's DeepSeek sell-off to trade back to within 0.8% of the peak registered last week.

"Surprise reigns supreme and will continue to when Feb 1 comes and goes," says Evercore. "Near all-time highs, SPX could move 3-5% in either direction short term, on the road to 6,800 at year-end, depending on whether he does or he doesn't announce tariffs on 2/1, as typically volatile February begins."

The CBOE VIX index VIX, a measure of expected S&P 500 volatility that's known as Wall Street's fear gauge, is around 15, below its long-term average of 19.5, and currently underpricing surprise, according to Evercore.

They therefore suggest a long option straddle trade on the highly liquid SPDR S&P 500 ETF Trust SPY to capitalize on any fresh equity wobble.

Options give a trader the right to buy (a call option) or the right to sell (a put) an underlying security at a particular price (the strike) by a designated date (expiration).

A straddle trade is when the investor buys both a call and put option on the same security at the same strike price and same expiration. The strategy can be used when the trader thinks the market may be volatile - perhaps because of an expected event -but is unsure which direction the market will take.

Evercore's straddle is to buy the SPY 615 April calls and the SPY 615 April puts. The chart showing the potential outcome of the trade is shown below. "A long straddle strategy inherently anticipates an increase in volatility," they say.

"In order for this strategy to be profitable, SPY must trade either above $645.44 (long call strike plus total premium paid) or below $584.56 (long put strike less total premium paid) vs. the current level of $605.04," says Evercore in its note published after Thursday's close.

Markets

U.S. stock-index futures (ES00) (YM00) (NQ00) are higher as benchmark Treasury yields BX:TMUBMUSD10Y rise. The dollar index DXY is up, while oil prices (CL.1) slip.

   Key asset performance                                                Last       5d      1m      YTD    1y 
   S&P 500                                                              6071.17    -0.49%  2.17%   3.22%  22.44% 
   Nasdaq Composite                                                     19,681.75  -1.37%  0.31%   1.92%  25.93% 
   10-year Treasury                                                     4.541      0.00    -9.50   -3.50  37.93 
   Gold                                                                 2844.2     2.41%   7.22%   7.76%  38.26% 
   Oil                                                                  72.45      -2.88%  -2.19%  0.81%  0.07% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor's Business Daily.

The buzz

The Federal Reserve's favored inflation gauge, the core personal consumption expenditure price index, rose 2.8% in the year to December, in line with forecasts and the same as in November.

Fed Governor Michelle Bowman will speak at 8:30 a.m. on the economy and community banks.

Apple $(AAPL)$ shares are up more than 4% in premarket action after the iPhone maker beat Wall Street earnings estimates.

Deckers Brands $(DECK)$ shares - which had surged 73% over the past 12 months - are dropping 15% after the owner of Hoka footwear gave cautious guidance on current trading.

Exxon Mobil shares $(XOM)$ are higher after the oil giant reported profit and cash flow beats.

The NYMEX front-month gold contract (GC00) late Thursday rose above $2,850 an ounce for the first time as Goldman Sachs reiterated its $3,000 price target, saying the yellow metal was a hedge against tariff escalation and government debt fears.

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The chart

Meb Faber, founder of Cambria Funds, brought this chart from Goldman Sachs to our notice via his message on X. One would imagine that not many investors knew European banks have outperformed the Mag. 7 over the last two years. However, the STOXX Europe 600 index XX:SXXP did finish at a record high Thursday, having gained 6.15% already this year.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Tickers  Security name 
   NVDA     Nvidia 
   TSLA     Tesla 
   AAPL     Apple 
   GME      GameStop 
   MSFT     Microsoft 
   TSM      Taiwan Semiconductor Manufacturing 
   PLTR     Palantir Technologies 
   INTC     Intel 
   META     Meta Platforms 
   AMD      Advanced Micro Devices 

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The first 100 days of President Trump's second term look packed with potential market movers such as new tariffs and tax policies. Here's what investors expect Trump to prioritize in 2025 and lessons from his first term's early days.

-Jamie Chisholm

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January 31, 2025 08:35 ET (13:35 GMT)

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