European stocks have risen in the first hour of trading, with French stocks bouncing back. The Eurostoxx is up by 0.6%, Germany’s DAX has gained 0.4%, France’s CAC 40 is up by 0.8%, and Italy’s FTSE MIB has increased by 0.6%. The UK FTSE has stayed the same, and Spain’s IBEX has risen by 0.3%. Despite these gains today, France’s CAC 40 index is down 2% for the week, and Germany’s DAX has fallen by 0.9%. US futures are showing slight increases, with S&P 500 futures rising by 0.1% and Nasdaq futures remaining unchanged. Nvidia has beat earnings estimates, but uncertainties related to China continue to pose challenges.

Europe’s Market Stability

Current market trends suggest that France’s political crisis might already be priced in. Some analysts believe that the stability of the European market largely depends on Germany, while French assets reflect some political risk. While concerns about France’s situation persist, there are no major worries in the wider European market. The small rebound in European markets indicates that the initial shock from France’s political situation may be easing. Although the CAC 40 is positive today, it is still down for the week, suggesting that confidence remains shaky. This situation might be an opportunity for traders who think the worst has been accounted for, as suggested by some major banks. A key indicator to observe is market volatility, which spiked after the unexpected election announcement in France in early August. The Euro VSTOXX index, which measures volatility in Eurostoxx 50 options, rose to nearly 25 but has now settled around 20. This decrease indicates that panic is subsiding. The drop in implied volatility, even amidst market nerves, makes selling options premiums a potentially attractive strategy for the upcoming weeks. For those who believe the crisis is under control, selling out-of-the-money puts on the CAC 40 or the Eurostoxx 50 due in September could be a smart move. This approach benefits from the gradual market recovery and the slow decline in option prices as volatility continues to normalize. We witnessed a similar trend following political uncertainty in Italy in 2022, when selling volatility became profitable once initial fears eased.

Risk Management Tactics

However, caution is essential, and hedging is a wise choice. The French-German 10-year bond spread, an important risk indicator, widened to over 80 basis points earlier this month and is currently around 65 points, which is still above its historical average. Traders might consider buying puts on specific French banks that are vulnerable to government risk, as a cost-effective way to protect against a potential second wave of selling. The growing gap between Germany and France is also shaping up as a clear trading theme. Recent flash PMI data from this week showed German manufacturing sentiment rising to 48.5, while French services dipped to 47.0 amid domestic concerns. This supports a strategy of going long on German DAX futures while shorting CAC 40 futures, betting that Germany will outperform in the short term. Create your live VT Markets account and start trading now.

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