EU’s chief trade negotiator, Maros Sefcovic, discussed the ongoing trade talks and noted that the final phase is proving to be tough. He plans to brief EU ambassadors on the latest updates, with a deadline for a deal set for August 1st. Analysts predict that the U.S. might impose tariffs of around 10%. Meanwhile, the EU is working to secure concessions in important areas. If a deal isn’t reached by the deadline, an extension is likely, allowing the EU to continue paying the current 10% tariff, which has been in effect since April 9th.

Market Uncertainty and Volatility

With the chief negotiator’s comments in mind, we anticipate that the next few weeks will bring increased uncertainty. This market climate is favorable for strategies that thrive on price fluctuations, known as volatility. We expect significant movements in European stock and currency markets as we approach the August 1st deadline. There’s potential to profit in the options market, as current prices may not fully account for the risk of talks breaking down. The Euro Stoxx 50 Volatility Index (VSTOXX), a key measure of fear in European markets, is currently low at around 15, making it cheaper to buy options. We are considering purchasing straddles on major indices, which would benefit from substantial price swings, regardless of whether a deal is reached or not. History offers insight into how markets respond to political deadlines. During the peak of the U.S.-China trade war in May 2019, the VIX index, which tracks U.S. market volatility, jumped over 45% in just a few weeks due to rising tariff threats. We anticipate a similar, but smaller, reaction in European markets if the current negotiations falter.

Sector and Currency Impact

Some sectors are more vulnerable than others, especially the European auto industry, which exported over €40 billion worth of vehicles to the U.S. last year. A 10% tariff would directly affect the profits of leading German and Italian car manufacturers. We are considering buying put options on these companies to hedge against or profit from a negative outcome. The currency market also offers clear opportunities, as the trade negotiations will significantly impact the EUR/USD exchange rate. If a deal falls through, the Euro is likely to weaken. We can prepare for this by acquiring EUR/USD put options, which will gain value if the Euro depreciates. If an extension is announced, as initially suggested, implied volatility would likely decrease since the immediate risk is delayed. In that case, we would consider selling the volatility we’ve accumulated to take profits. This strategy allows us to reassess and adjust our positions ahead of the next important deadline. Create your live VT Markets account and start trading now.

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