Russian drones from Iran entered Poland, but this had little impact on the markets, only causing small increases in the USD. Authorities closed two airports, and parts of Poland went into lockdown due to concerns. Some politicians called this an “act of war.” Even with these pressures, financial markets stayed stable. In the U.S., a court decision kept Lisa Cook as a Fed Governor, influencing the September FOMC meeting vote. The ruling clarified that grounds for dismissal relate to current conduct, not past actions, causing a slight dip in the dollar.

Chinese Economy and Corporate Updates

China’s economy is facing deflation, with the August Consumer Price Index (CPI) at –0.4% year over year, and the Producer Price Index (PPI) down by –2.9% year over year. However, the rate of PPI decline slowed for the first time in months. In corporate news, Oracle’s shares jumped over 25% after securing several billion-dollar cloud contracts. In the Asia-Pacific region, markets showed gains: Japan’s Nikkei 225 rose 0.65%, Hong Kong’s Hang Seng increased by 1%, the Shanghai Composite was up 0.16%, and Australia’s S&P/ASX 200 grew by 0.25%. The market’s calm response to the Russian drones in Poland highlights a possible mispricing of geopolitical risk. The Cboe Volatility Index (VIX) is low at around 14, similar to the period just before Russia’s 2022 invasion of Ukraine, when the index surged above 35. Investing in VIX call options or long-dated puts on European indices like the Euro Stoxx 50 could be a cost-effective way to protect against a sudden rise in tension. Increased tension in Europe may lead to a rise in energy prices, much like Brent crude oil spiked from $90 to over $120 per barrel in early 2022. We think oil and natural gas call options are undervalued now that a NATO-Russia conflict is being discussed, even if it’s unlikely. These derivative positions could provide considerable gains if the situation worsens in the coming weeks.

Federal Reserve Developments

The Federal Reserve is facing changes, with the court ruling keeping Governor Cook on the FOMC adding a dovish element ahead of the next meeting. While Fed Funds futures predict more than a 70% chance of another rate hike, this situation introduces some uncertainty. We may use options straddles on 2-year Treasury note futures to capitalize on potential interest rate volatility, no matter how the meeting turns out. China’s return to deflation suggests a serious lack of domestic demand. This is negative for industrial metals and the currencies of exporting nations, leading us to consider buying puts on copper futures and the Australian dollar. With copper struggling to maintain $8,100 per metric ton, more weak data from China could lead to a quick drop. Lastly, Oracle’s significant 25% after-hours stock jump indicates that tech sectors like enterprise cloud and AI remain strong despite the overall economic downturn. Instead of broad index investments, we’re focusing on call option spreads for the Technology Select Sector SPDR Fund (XLK), which is already up 32% this year. This strategy allows us to engage in the upside of key tech stocks while minimizing risk. Create your live VT Markets account and start trading now.

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