European markets are thriving after the US-Japan trade deal, even with ongoing political issues in Tokyo. This has influenced various financial instruments, particularly the USD/JPY pair, which saw fluctuations throughout the day, reflecting trader uncertainty. Japanese Prime Minister Ishiba achieved the trade agreement with some concessions in agriculture, though it is still debated in parliament. Market optimism is strong, as shown by Japan’s Nikkei 225 index, which rose by 3.5%, boosting European markets as well. The DAX climbed by 0.6%, and French stocks led the way with gains of over 1%.

US Futures and Currency Performance

US futures are looking positive, with S&P 500 futures up by 0.4% as markets anticipate earnings reports from Alphabet and Tesla. The dollar is showing mixed results; USD/JPY reached a high of 147.20 but later settled at 146.20. In addition, commodity currencies are performing well, with AUD/USD hitting 0.6600. Meanwhile, Japan’s bond yields have surged, rising by 9 basis points to 1.59% as discussions about potential interest rate hikes from the Bank of Japan continue. Commodities are fairly stable, with gold slightly down and cryptocurrencies like Bitcoin pulling back after recent gains. These changes highlight the ups and downs of global markets amid political and economic news. We view the rise in Japanese equities as a chance to sell some upside. Due to the political uncertainty surrounding the prime minister, we think the current rally is overdone and see an opportunity to sell out-of-the-money call options on the Nikkei 225. Historically, political instability in Tokyo has caused sharp and unpredictable market reversals. The increase in government bond yields is a key signal, and we are positioning for a stronger yen. With the 10-year yield hitting levels not seen in over a decade and overnight swaps suggesting at least 15 basis points of hikes this year, buying puts on USD/JPY seems appealing. The pair’s initial resistance around the 147 level supports this bearish outlook.

Cautious Approach to US Equities

In US equities, we are cautious ahead of the upcoming tech earnings reports. While the improved trade sentiment is a positive sign, we’ve seen some stocks move over 10% in just one day following earnings from major tech companies like Meta and NVIDIA. We suggest purchasing short-dated straddles on the Nasdaq 100 to potentially capture volatility spikes, no matter the direction. We prefer commodity currencies over the euro due to differing central bank outlooks. With Australian inflation data holding steady above 3.5%, the positive market mood is benefiting the Aussie dollar in comparison to the euro, where traders are lowering ECB rate hike expectations. Therefore, we are considering options strategies that could profit from a decline in the EUR/AUD cross. Despite the general optimism, the political situation in Tokyo remains a significant risk for global markets. As the VIX index trades near multi-month lows below 13, we see this as a great time for adding protection to our portfolios. Buying inexpensive, far out-of-the-money put options on the S&P 500 can help guard against sudden geopolitical or earnings-related shocks. Create your live VT Markets account and start trading now.

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