The EU’s trade chief recently announced that the new agreement with the US is just the beginning of efforts to reduce trade tensions. Working together is seen as more beneficial than getting into a trade war. There are ongoing efforts to ease tensions, especially since not all EU member states agree on the deal. The framework in place has reduced trade uncertainty, which helps prevent major conflicts. Looking ahead, more improvements are expected, creating a more stable trading environment.

Strategic Approaches To Market Volatility

According to Mr. Sefcovic, traders in derivatives should prepare for lower market volatility. The existing framework and ongoing negotiations lower the chance of a sudden trade war, which has historically led to sharp increases in volatility. This implies that selling options, which gain value from falling implied volatility, could be a good strategy in the coming weeks. The US-EU trade relationship, worth over $1.3 trillion in 2023, highlights the importance of reducing tensions. Any decrease in tariff uncertainty positively impacts the global economy. This overall stability supports the idea that market volatility, especially for European stocks, is likely to stay low or decrease further. Historically, the VIX index spiked above 25 during the US-China trade war in 2018 and 2019 when new tariffs were introduced. Now, we expect the opposite to happen, as reduced tensions should limit increases in volatility. Thus, we see this as a chance to profit from low volatility, as the worst-case scenarios have been largely eliminated.

Sector Specific Opportunities

This perspective is especially relevant for derivatives linked to export-heavy European sectors, like German automakers who rely on the US market. With the risk of auto tariffs currently low, implied volatility for indices like Germany’s DAX should decrease. There are opportunities in strategies that thrive on stability within these trade-sensitive stocks. The Euro Stoxx 50 Volatility Index (VSTOXX) has recently been near its yearly lows, around the 13-15 level, indicating a calm market. Mr. Sefcovic’s comments support this trend, suggesting that any brief spikes in volatility due to unrelated news could be good times to start new short volatility positions. The reduced friction in trade serves as a solid foundation for this outlook. Create your live VT Markets account and start trading now.

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