European stocks started off slowly, with major indices showing small declines. The Eurostoxx, Germany’s DAX, and France’s CAC 40 each fell by 0.3%, while the UK FTSE dropped by 0.1%. Spain’s IBEX and Italy’s FTSE MIB remained steady. Investors in Europe are closely watching updates on US-EU trade talks. They are also focusing on the European Central Bank’s meeting later this week, expecting it to keep interest rates steady during the summer policy pause. S&P 500 futures also reflect this cautious mood, staying flat.

Opportunity in Low Volatility

The slow start mentioned by Mr. Low is creating an opportunity for investors. With major indices like the Eurostoxx showing little movement, implied volatility is low. Europe’s main volatility index, the VSTOXX, is around 14, below its one-year average of 16.5. This makes buying options cheaper ahead of potential market-moving events. The biggest risk remains the US-EU trade discussions, especially around possible auto tariffs that could increase. We are preparing for a significant market shift by looking into long strangles on indices that focus on the automotive sector, like the Germany DAX. A clear announcement on tariffs or a definitive resolution could quickly resolve the current market uncertainty. While the European Central Bank is expected to keep interest rates unchanged, the market sees over an 80% chance of a rate cut in June. Therefore, any hints of changing stance from the bank’s president could lead to significant adjustments in interest-rate-sensitive derivatives. We are looking for subtle changes in the official statement for insights into future policy.

Market Protection Strategies

We remember the market volatility during the 2018 trade disputes, when tariff news led to daily swings of more than 2% in major European indices. Considering the current flat sentiment, we believe it’s wise to buy downside protection. Purchasing out-of-the-money put options on the Eurostoxx 50 provides a cost-effective way to guard against sudden negative moves. Create your live VT Markets account and start trading now.

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