European stocks opened slightly higher today. The Eurostoxx rose by 0.3%, Germany’s DAX by 0.1%, France’s CAC 40 by 0.5%, the UK’s FTSE by 0.2%, Spain’s IBEX by 0.5%, and Italy’s FTSE MIB by 0.5%. These movements set a positive tone for the morning. US futures remain steady after a slow performance recently. The S&P 500 futures increased by 0.1%. Everyone is waiting for the US CPI report, which will impact European trading this morning.

The Focus for the Coming Weeks

With the markets calm, all eyes are on the upcoming US CPI report. European indices like the DAX and CAC 40 have posted small gains, but this is likely just a calm before a potential storm. The key inflation data will determine the direction for risk assets. Expectations place US year-over-year inflation at around 2.8%, which is above the Federal Reserve’s target of 2%. Since the Fed has paused its rate cuts and lowered the benchmark to 3.75% earlier this year, a higher number might delay further cuts in 2025. This makes the market sensitive to any surprises. Implied volatility is rising, with the VIX index nearing 16, indicating traders anticipate significant market movements after the announcement. Options on the S&P 500 show that the cost of protection has increased in the past week, signaling a chance for those willing to trade the volatility. For derivative traders, this situation suggests strategies that take advantage of sharp movements in either direction. We might look into setting up straddles or strangles on major indices like the S&P 500 or the Euro Stoxx 50. This involves buying both a call and a put option to position for a breakout from the current tight trading range.

Market Reactions to CPI Prints

We remember how the market reacted to CPI prints in 2023 and 2024. A mere 0.1% deviation from expectations could cause a 2% swing in equities. The current setup feels similar, as central bank policies depend on these monthly reports. We should use the lessons from that time to manage our risks today. If US inflation comes in higher than expected, it will influence not just US markets but also the European Central Bank. The ECB has been closely following the Fed’s actions, and persistent US inflation could hinder hopes for another rate cut in Frankfurt this autumn. This makes short-term positions on European equities risky ahead of the data release. Therefore, we should review our portfolios for directional risk and consider hedging against potential unfavorable movements. The calm opening this morning shouldn’t be seen as stability. It’s an ideal time to prepare for the volatility we expect later this week. Create your live VT Markets account and start trading now.

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