EU member states are backing potential counter-tariffs worth €93 billion on US goods, say EU diplomats. This action serves as a backup if talks fail by the August 1 deadline. The counter-tariffs are compiled into a single list and can be activated if the US raises its tariffs on the EU. This would occur if both sides do not reach an agreement by the deadline.

Impact On Derivative Markets

We expect a significant increase in implied volatility in derivative markets in the coming weeks. The August 1 deadline serves as a trigger, meaning options prices on major indices will likely rise as uncertainty grows. Traders should prepare for greater market fluctuations, rather than expecting calm. The large trade relationship, which was about $1.2 trillion in 2023, means any tariffs will significantly impact stock markets. We think derivatives linked to the German DAX and the US S&P 500 will be especially affected, given their many multinational industrial and tech companies. Increased hedging with index futures and options makes sense in this context. The EUR/USD currency pair will be crucial for macro traders. Comments from key negotiators, such as Dombrovskis or Tai, could cause sharp changes in the exchange rate. We predict a rise in the popularity of options that bet on a wider trading range for this currency pair.

Lessons From Past Trade Disputes

Looking back at the trade disputes in 2018-2019 can help us anticipate what may happen. During the rise in May 2019, the VIX volatility index surged from about 13 to over 20 in just weeks. We are preparing for similar spikes in volatility as new updates emerge ahead of the deadline. Sectors like automotive and agriculture will face the biggest risks, and we’re closely watching derivatives related to them. Since the US exported over $34 billion in agricultural products to the EU last year, futures contracts on commodities like soybeans may see increased activity and price fluctuations. This environment offers opportunities for traders familiar with these physical markets. In this situation, options strategies that profit from price changes in either direction, such as long straddles, can be valuable. Buying put options on indices with heavy export exposure can effectively hedge against negative outcomes from negotiations. The key is to have a strategy ready before volatility rises sharply. Create your live VT Markets account and start trading now.

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