The EU and the US have finalized a trade agreement that sets a 15% tariff on most goods exchanged between the two. This agreement resolves a long-standing conflict and reduces the potential 30% tariff previously threatened by the US. Some products will have no tariffs, including aircraft, semiconductor equipment, and certain agricultural items. There are plans to broaden this list of exemptions. While specific details are not provided, the EU has promised not to impose retaliatory tariffs and has committed $600 billion in investments in the US.

Trade Negotiations And Influences

The EU wanted a better deal than the UK’s 10% tariff from May. Ongoing US-Japan negotiations that established a 15% baseline played a role in this decision. President Trump announced that the EU would buy $750 billion worth of energy from the US. The 15% tariff will apply to imports like cars and pharmaceuticals, while details on alcoholic beverages are still pending. The EUR/USD exchange rate rose after this announcement. Furthermore, the US and China agreed to a 90-day extension on their tariff pause, helping to ease trade tensions. The agreement also includes Europe’s plan to replace Russian gas with $250 billion in US energy purchases each year for the remainder of Trump’s term. We view this agreement as primarily a way to reduce uncertainty, which is more significant than the 15% tariff figure itself. Dropping the threatened 30% tariff eliminates a major risk that has burdened markets. This suggests that implied volatility in major indices should decrease, presenting opportunities to sell VIX futures.

Sector Opportunities And Risks

The specific exemptions offer clear opportunities for traders focused on certain sectors. With the transatlantic trade in aircraft and parts exceeding $37 billion annually, the 0% tariff is a major advantage for aerospace manufacturers on both sides of the Atlantic. We believe buying call options on these specific industrial stocks is a wise way to express a bullish outlook. On the other hand, the 15% tariff on European cars, though an improvement, will still hurt profitability. The EU exported over 3.7 million cars to the US in 2022, so this new cost could limit gains for European automotive stocks. We would consider selling out-of-the-money call spreads on these manufacturers to benefit from a limited rally. In the currency markets, the initial strength of the EUR/USD pair may just be a short-term reaction. The EU’s promise to buy hundreds of billions of dollars in US energy and make other investments will create ongoing, high demand for US dollars. We predict this will pose challenges for the euro in the medium term, making short EUR/USD futures a potentially attractive position after this initial spike. The former president’s commitment to replace Russian gas is a major shift for US energy producers. It establishes a stable export market for American liquefied natural gas (LNG), which was uncertain before. We see this as a reason to take long positions in US natural gas futures and related energy stocks. The extension of the tariff pause with China reinforces a global trend of reducing risk. Historically, when the USMCA trade deal was finalized, the market experienced a several-month decline in volatility. We anticipate a similar, though possibly less intense, trend, making short-volatility strategies on broad indices appealing in the upcoming weeks. Create your live VT Markets account and start trading now.

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