European markets are mainly watching the upcoming trade talks between the US and the EU instead of focusing on the European Central Bank (ECB). Market changes are slight, with the DAX up 0.1% and the CAC 40 down 0.2%. The IBEX fell by 0.1%, the UK FTSE rose by 0.1%, and Italy’s FTSE MIB dropped by 0.8% due to Stellantis reporting a €2.3 billion loss in the first half.

Growing Trade Tensions

The EU plans to impose retaliatory tariffs on US goods totaling around €72 billion. This includes €11 billion on aircraft, €9.4 billion on machinery, €8 billion on cars, and €1.2 billion on alcohol. Both sides will meet again for talks on August 1. Increased trade tensions could harm local stock performance. While the ECB is expected to make a policy decision later this week, it will likely keep its current stance through the summer. Therefore, the ECB’s meeting will likely be less significant compared to the pressing trade negotiations, which will probably drive market sentiment more. According to analysis from Low, the biggest risk for European markets is a failure in the US-EU trade discussions. Derivative traders should prepare for higher volatility and possible declines, especially as we near the August 1 deadline. The current market uncertainty offers a chance to position for when a clear direction becomes evident. We suggest buying put options on major European indices like the DAX and CAC 40. The Euro STOXX Volatility Index (VSTOXX) is currently low at around 14, meaning options pricing does not fully reflect the potential for fear. This makes it a good time to buy protection ahead of what could be a tense negotiation period.

Impact of Trade Disputes on Stocks

Historical data indicates that trade disputes can severely impact regional stocks. For example, during the peak of the 2018 trade war, the export-driven German DAX fell over 18% in six months as tariffs were implemented. A similar negative reaction could occur if current negotiations fail. Traders should also focus on specific sectors mentioned in the proposed tariffs. Since the EU’s list includes autos, machinery, and aircraft, buying puts on leading companies in these industries can be a smart way to hedge. The recent drop in Stellantis stock demonstrates how quickly market sentiment can shift for exposed companies. The ECB’s expected inaction clarifies our outlook. With monetary policy likely on pause this summer, the focus shifts away from interest rate speculation and centers on the trade discussions. This makes the trade negotiations the key factor for market movements in the coming weeks. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now