European stocks struggled in early August due to US trade tensions. Both the DAX and CAC 40 indexes dropped about 2%, wiping out July’s gains. S&P 500 futures fell by 1% as new tariffs from the US weighed on market sentiment. Apple and Amazon’s earnings reports spotlighted the challenges tariffs pose to their performance. Different market segments reacted to the tensions in various ways. The Japanese Yen (JPY) was the strongest currency, while the Swiss Franc (CHF) lagged behind. The USD/CHF rose by 0.4% to 0.8160 after the US imposed a 39% tariff on Switzerland. The EUR/USD remained steady at 1.1410, but GBP/USD decreased by 0.3% to 1.3160. The New Zealand dollar dropped 0.4% to 0.5863 after the US announced 15% tariffs.

Commodities and Bond Market Movements

In commodities and bonds, US 10-year yields rose by 3.6 basis points to 4.396%, while gold increased by 0.2% to $3,297.61. WTI crude oil fell by 0.9% to $68.61, and Bitcoin decreased by 1.1% to $115,260, with Ethereum reaching a week-long low. Investors are awaiting the US jobs report, which could further influence the markets. With stocks under pressure and trade news shaping the market, we are clearly in a risk-off atmosphere. This uncertainty tends to increase volatility, similar to the spikes we saw during the 2018-2019 trade conflicts when the VIX index often rose above 20. Buying VIX call options could be an effective way to hedge against potential equity drops in the weeks ahead. The alerts from Apple and Amazon about tariffs suggest that caution is needed in the tech sector and within the S&P 500. We recall the significant equity drops in 2018 during similar trade tensions, with the S&P 500 falling nearly 7% in May 2019 alone. Therefore, purchasing put options on indices like the SPY or QQQ might be wise to guard against a similar scenario.

Safe Havens and Speculative Positions

In periods of global stress, money tends to flow into the US dollar, and we’re seeing that trend again. Given that speculative trading has favored the dollar for much of the past year, holding long positions in the dollar against tariff-impacted currencies like the NZD looks promising. The Japanese yen also serves as a key safe haven, making long JPY positions appealing. The upcoming US jobs report is a wild card that could quickly change the narrative. Recent reports, like the one from June 2024, which exceeded expectations by adding 272,000 jobs, could pressure the Fed if today’s report is strong. While this might temporarily strengthen the dollar, it could worsen the outlook for stocks already concerned about tighter financial conditions. Gold is having trouble acting as a reliable safe haven due to rising US Treasury yields. As the 10-year yield approaches 4.40%, the opportunity cost of holding non-yielding gold increases, a trend that has dampened gold rallies since 2023. We need to monitor the 100-day moving average; a significant drop below this level might lead to a deeper sell-off. Create your live VT Markets account and start trading now.

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