Dow Jones futures climbed over 0.2% to around 44,440 during Monday’s European session. The S&P 500 futures also went up, gaining 16 points to about 6,316. This indicates a positive start for US stocks. US stock indices have traded within a narrow range for the last three weeks. This instability is due to the uncertain effects of President Trump’s tariffs on various sectors.

Tariff Effects on Global Trade

Tariffs have been imposed on imports like cars and base metals, impacting 22 countries, including Japan, South Korea, and members of the EU. Some countries are in talks with the US to finalize agreements before the August 1 deadline. The US monetary policy is under close observation, especially since recent Consumer Price Index (CPI) data revealed rising prices linked to the tariffs. The chance of the Federal Reserve cutting interest rates in September has slipped to 58.5%, down from almost 70% last month. The Dow Jones Industrial Average (DJIA) includes 30 US stocks and is weighted by price. Its performance is influenced by quarterly earnings, macroeconomic indicators, and interest rates. Dow Theory analyzes market trends by looking at movements in the DJIA and the Dow Jones Transportation Average (DJTA). Traders can invest in the DJIA through ETFs, futures, and options. Given the market’s recent narrow trading range, we see this positive opening as a chance to prepare for future moves, rather than indicating a new long-term trend. The CBOE Volatility Index (VIX) is now below 14, close to its 52-week low, suggesting that options prices are relatively inexpensive. This low cost for options offers a good entry point for traders expecting a price breakout.

Imminent Negotiation Deadline

The biggest source of uncertainty is the administration’s new tariffs and the approaching August 1 deadline. Historically, during the 2018-2019 trade tensions, volatility increased around such policy announcements, with the VIX often rising above 20. We anticipate similar fluctuations as negotiations with the impacted 22 nations heat up. Changes in monetary policy also add complexity to the market. While the text mentions a drop in rate-cut odds to 58.5%, the latest CME FedWatch data indicates that the chances of a September rate cut have fallen further to about 51%. This decreasing likelihood of lower financial conditions takes away a crucial support for stocks. Thus, we suggest traders shift their focus from directional bets to volatility strategies in the upcoming weeks. With low implied volatility, using strategies like long straddles or strangles on index futures could be beneficial. These tactics allow traders to profit from significant price movements in either direction, which is likely as the deadline approaches. For a more precise and defined risk strategy, consider using options on sector-specific ETFs. Automobiles and industrial metals are directly affected, making their derivatives sensitive to negotiation news. This enables more targeted trading based on specific policy outcomes rather than the overall market. Create your live VT Markets account and start trading now.

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