European stocks are on track to finish the week on a high note after a slow start. The German and UK index benchmarks are nearing new record highs, bouncing back from earlier negative sentiments about risk. US futures are showing slight gains, and Wall Street seems to remain generally positive. The S&P 500 futures, for example, have risen by 0.1% so far.

European Markets Resilience

European markets are rebounding impressively and approaching all-time highs, indicating underlying strength. The German index, for instance, is hovering just below its mid-May peak of over 18,800, creating opportunities for bullish strategies. This strength may benefit traders who are ready for further increases. However, the latest Eurozone inflation data showed an unexpected rise to 2.6% in May. This complicates things for the European Central Bank (ECB), which is expected to cut rates soon. Although a rate cut in June seems likely, the future of cuts is now uncertain. For those trading derivatives, this environment indicates that long volatility positions may be undervalued. Even though the surface appears calm, with the V2X volatility index dropping from its April highs, mixed signals between central bank policies and inflation could cause sudden moves. A sound strategy may be to buy call options to take advantage of upward trends while holding some protective puts.

US Inflation And Federal Reserve Policy

In the United States, persistent inflation and a strong job market are pushing back expectations for a Federal Reserve rate cut, adding complexity to the situation. Historically, differences in central bank policies can create turbulence across markets. We’ve seen instances, like in late 2021, where markets at all-time highs can quickly reverse when monetary policy expectations change. Thus, our primary focus is on strategies that can capitalize on either continued upward movement or a period of stable prices. Selling out-of-the-money put credit spreads on indices like the S&P 500 allows us to earn premium while providing a cushion against minor declines. This strategy leverages the current positive sentiment while recognizing the inherent risks. Create your live VT Markets account and start trading now.

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