Eurostoxx futures dropped by 0.2% in early European trading. The atmosphere is cautious due to mixed results from Wall Street overnight. German DAX futures fell by 0.4%, French CAC 40 futures by 0.2%, and UK FTSE futures by 0.1%. Uncertainty surrounding the US-EU trade deal is adding to this caution as the August 1 deadline approaches.

Mixed Wall Street Results

Wall Street had mixed performances, with the Dow finishing 0.7% lower while the Nasdaq gained 0.2%. US futures rose by 0.2% today, but the effect on European stocks is noticeable before the markets open. The current decline in European futures shows growing caution. This trend isn’t only a response to Wall Street but also reflects uncertainty at home, especially with the approaching trade deadline. It seems wise to adopt a defensive approach in the coming weeks. Volatility is increasing, and options markets are reflecting this change. For example, the Euro Stoxx 50 Volatility Index (V2X), which measures fear in Europe, spiked over 17% in a week after a snap election was announced in France. This indicates that traders are willing to pay more for protection as potential political instability looms. In this context, buying protective puts on indices like the DAX and CAC 40 makes sense. This strategy helps limit potential losses to the cost of the option. It’s a sensible way to manage risk in these uncertain market conditions.

Historical Market Patterns

This situation resembles the market environment in 2016 around the Brexit vote, when political news heavily influenced market movements for weeks. During that time, implied volatility was high, making it costly yet essential to hold protective positions in portfolios. We expect a similar pattern of volatility until political and trade issues clear up. The mixed results among industrial and technology stocks in the US indicate important differences that can be capitalized on. This implies that not all sectors will react the same way to current pressures, presenting opportunities for pairs trades—going long on a strong sector while shorting a weaker one. Create your live VT Markets account and start trading now.

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