Hi
Borate's solution will work but unless I am mistaken, after adding the effect transition to the video you will have to unlink the sound track on Clip 2, pull it down to Audio Track 2 and then to the left so it overlaps the Audio of Clip 1. Then you can add your fades. This means that the Audio for Clip two will be out of sync. If you are using Music this probably won't matter. The problem here is that you can't simply place your Clip 2 onto the overlay track and have an animated transition between the two clips on the different tracks.
There is a partial solution. Put your clips together on Video track 1.
Drag clip2 up to the overlay track and to the left a little. (giving a suitable overlap....say 2-3 seconds.
Using the prompt buttons under the preview screen move the red cursor line to the left end of Clip2.
Now split Video track1 (Video only)
Delete the cut off portion
Unlink the audio from Clip2
Now drag Clip 2 back down to the Video track 1
You should now have the audio tracks overlapped but both still in sync.
Apply the fade-out and fade-in to the overlap in the audio tracks as Borate suggests.
Apply your circle transition to the Clips.
As I said this is only a partial solution as the audio crossfade only happens half way through the transition but it might be better than nothing.
(Much later...)
Better solution...See below
Nat