Barclays Warns of Overlooked Risks in Commodity Stocks Due to Trump Tariffs

Barclays has issued a warning that the risks associated with Trump's tariff policies are being overlooked, which could exacerbate the decline in commodity stocks. Stefano Pascale, a derivatives strategist at Barclays, noted that option traders are underestimating the risks faced by commodity stocks. This underestimation allows investors to protect themselves from potential losses due to Trump's tariff policies at a relatively low cost.

Pascale highlighted that the expected volatility in the commodity sector is at its lowest level in nearly two decades compared to the S&P 500 index. This makes purchasing downside protection relatively inexpensive. The price volatility in the commodity sector is relatively mild compared to the broader U.S. market, especially when compared to technology stocks. However, the commodity sector, which includes steel manufacturers and paper producers, is highly dependent on global supply chains and is therefore vulnerable to the trade measures implemented by the Trump administration. Trump is expected to announce further tariff measures on Wednesday.

Pascale and another Barclays strategist, Anshul Gupta, suggested that investors sell put options on the S&P 500 index while buying put options on the commodity sector. This strategy could provide a hedge against potential losses in the commodity sector due to Trump's tariff policies. The current measures to prevent further losses in commodity stocks may not be sufficient to mitigate the deeper risks posed by Trump's protectionist policies, which have already significantly impacted these stocks during his first term.

Historically, the commodity sector has been one of the worst-performing sectors during periods of trade tensions. In 2018, for example, the sector was the second-worst performer in the S&P 500 index due to Trump's tariffs on steel, aluminum, and durable goods. This year, Dow Chemical's stock price has already declined by 13%. Pascale noted that if economic data begins to show signs of weakness and evidence emerges that tariffs are hindering economic growth, these sectors could start to follow the downward trend of large technology stocks.

Pascale emphasized that the market is currently providing an excellent opportunity to buy low-priced put options on commodity stocks. Even without a trade war, this would be an attractive trade from a historical perspective. The analysis underscores the need for a more comprehensive assessment of the risks associated with Trump's tariff policies. The current market conditions, where option traders are underestimating these risks, could lead to a more pronounced decline in commodity stocks if the tariffs are implemented. Investors and policymakers alike should be aware of the potential economic fallout and take appropriate measures to mitigate the risks.