European stocks are showing slight improvement as we start the new week. The Eurostoxx has increased by 0.3%. Germany’s DAX and France’s CAC 40 have risen by 0.3% and 0.4% respectively, while the UK FTSE is up by 0.2%. Spain’s IBEX and Italy’s FTSE MIB gained 0.4% and 0.9%. In the U.S., futures are stabilizing, with S&P 500 futures up by 0.5%. This growth comes as investors hope for possible interest rate cuts from the Federal Reserve, following weak jobs data.

Swiss Market Decline

Swiss stocks have opened lower, with the SMI dropping by 1.8%. This decline is mainly due to Switzerland being on holiday last Friday, causing it to miss the declines seen in other markets that day. After a significant drop last Friday, European stocks and U.S. futures are bouncing back this morning. The market is shifting its view from “bad jobs data is harmful” to “bad jobs data could lead to Fed rate cuts.” This change in perspective is creating quick opportunities in the derivatives market. The downturn was triggered by the U.S. jobs report for July 2025, released last Friday. It revealed that Non-Farm Payrolls grew by just 65,000, falling short of the expected 190,000. Additionally, the unemployment rate unexpectedly rose to 4.1%, the highest in over two years. This data represents the first real sign of weakness in the otherwise strong labor market. As a result, the CBOE Volatility Index (VIX) soared above 20 on Friday, a level not consistently seen since early this year. Traders should be on the lookout for chances to sell volatility via options or VIX futures, betting that the initial fear will fade as the market embraces the rate cut narrative. However, there is a risk if the jobs data hints at an actual recession.

Fed Rate Cut Expectations

The immediate response is seen in interest rate derivatives, focusing on the Federal Reserve’s meeting in September. Fed fund futures are now indicating an almost 80% chance of a 25-basis-point cut, a stark rise from under 20% just a week ago. Traders will be actively purchasing SOFR and Fed fund futures contracts to prepare for this expected policy change. For equity index traders, this sets up a classic “Fed put” scenario, where the central bank is anticipated to support markets. One common strategy is to sell out-of-the-money put spreads on the S&P 500. This strategy bets that even if the economy slows, lower rates will help stabilize equity prices and avoid a larger sell-off. We’ve seen this approach before, especially in late 2023, when weakening economic indicators led to market gains based on expectations of a policy shift. That period showed how quickly markets can overlook bad news when monetary easing seems imminent. This historical context is encouraging traders to bet on a similar outcome now. The main risk is misunderstanding the Federal Reserve’s intentions, as core inflation still hovers above 3%. The Fed may prioritize fighting inflation over addressing a slight decline in the labor market, potentially undermining the “bad news is good news” viewpoint. Thus, maintaining some protection—like long-dated puts—remains a wise safeguard against an overly optimistic outlook. Create your live VT Markets account and start trading now.

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