Positive Market Sentiment

US futures are showing some caution, but European stocks are thriving. The European Central Bank announced that it won’t cut interest rates until at least December, and possibly longer. Despite this, the outlook remains bright. This week, European indices have recovered from last week’s losses. With the rebound in European stocks this week, there’s growing optimism in the market. This means that short-term call options on indices like the Germany DAX might be profitable if this positive trend continues into next week. The latest Eurozone inflation data for August, which stayed at a stubborn 2.8%, is currently being overlooked in favor of growth expectations. However, the European Central Bank’s strong commitment to maintaining rates at least until December limits how high the markets can realistically climb. This could be a good time to sell call credit spreads on the Eurostoxx 50, allowing for premium collection while betting that the index won’t rise sharply in the coming weeks. A similar situation occurred in late 2023, when markets rallied but stayed within a certain range due to central bank policies.

Risk and Opportunity

With this week’s rally, volatility has decreased, making protective put options more affordable. The VSTOXX index fell below 15, suggesting it could be wise to buy some protection for October, a month known for market ups and downs. Any unexpected changes in the upcoming US inflation report could quickly dampen the current positive sentiment. The cautious outlook from the US serves as a reminder not to be overly optimistic about Europe. We should look for differences, as European indices might perform better than American ones if local data remains strong. For example, German factory orders recently showed a slight increase of 0.5%, indicating some strength in Europe’s largest economy. Focusing on specific sectors could also provide advantages in this environment. European banking stocks often benefit in a higher-for-longer rate scenario, so call options on a financials ETF may do better than the overall market. On the other hand, sectors like utilities and real estate that are sensitive to rates may continue to lag, offering opportunities for bearish strategies. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now