The tariff rate set by Trump is 30%. This will affect EU imports starting 1 August. The European Union plans to impose retaliatory tariffs on American goods worth €72-84 billion. However, these have been postponed because both sides want to negotiate.

Importance Of The Coming Weeks

The next few weeks are crucial to prevent an escalation in trade tensions. Both the U.S. and the EU are open to negotiations, but the EU must act together and efficiently. We see this as a major shift for cross-Atlantic market risks. Recently, the market has seemed calm, but this letter from Trump’s administration is a significant turning point. Now, volatility becomes key. With the VIX recently in the low teens, we think this is the lowest point. In past trade escalations with China in 2018-2019, the VIX often went above 25 after tariff announcements. We anticipate a similar outcome this time. The best move is to buy front-month VIX calls or long-term straddles on the S&P 500. This strategy doesn’t involve betting on which way the market will go; instead, it focuses on the chances of market disruptions. Attention is focusing on specific European sectors. In 2023, the EU exported over $550 billion worth of goods to the U.S., creating a huge exposure. German car manufacturers are particularly vulnerable. Their vehicle and parts exports to the U.S. make up a substantial part of that total, amounting to tens of billions. We think put options on the DAX index are undervalued. Likewise, implied volatility for ETFs on European luxury goods and industrial machinery should be sought after. The potential retaliation from Brussels also threatens American technology and agricultural exports. For the next month, hedging long positions in the Nasdaq 100 with puts is a smart precaution.

Positioning Strategy

This isn’t a straightforward trade. Mentioning ongoing negotiations aims to create uncertainty. A sudden announcement of a deal, no matter how weak, could lead to a sharp market rally. This supports a long-volatility strategy rather than a strictly bearish one. Traders who are heavily short may get caught off guard. Therefore, the strategy should prepare for sudden movements in either direction. In the coming weeks, the focus will shift from fundamentals to analyzing news headlines and managing gamma exposure as deadlines approach. Create your live VT Markets account and start trading now.

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