European markets had mixed results today. The German DAX dropped by 1.09%, and France’s CAC fell by 0.69%. Meanwhile, the UK’s FTSE 100 rose slightly by 0.12%, Spain’s Ibex edged up by 0.07%, and Italy’s FTSE MIB stayed the same. The decline in Germany is due to worries about tariffs. The EU is thinking about retaliating against the US by August 1. President Trump has warned of a 30% tariff on the EU if no agreement is reached. Commerce Secretary Lutnick mentioned a minimum 10% rate, which could go up to 20% for major trading partners.

German DAX Movement

Despite today’s drop, the German DAX has risen 20.76% this year, similar to last year’s performance. This suggests a chance of a correction. The index fell below the 50 and 100-hour moving averages, between 24,204 and 24,246, and also went under the 200-hour moving average at 23,986. It couldn’t maintain these levels, indicating that staying below 23,986 boosts sellers’ confidence. Given the mixed market results and upcoming trade tensions, we think derivative traders should brace for more volatility. Strategies that benefit from price changes, rather than predicting a specific direction, may be helpful in the next few weeks. This environment favors option-based strategies over direct futures. The August 1 deadline, highlighted by the President, is a major concern. Lutnick’s mention of a minimum 10% tariff adds to market anxiety, particularly for countries that rely on exports. With the US having a goods trade deficit of $205 billion with the EU in 2023, the economic stakes are very high for both parties.

Economic Sentiment and Market Volatility

New data supports this cautious view. Germany’s ZEW Economic Sentiment indicator, a key measure of investor confidence, unexpectedly fell in May 2024, showing ongoing pessimism about the country’s near-term outlook. This indicates that fears of a slowdown, potentially aggravated by trade conflicts, are already affecting the market. We can compare this situation to the 2018-2019 US-China trade war, which caused sharp, unpredictable swings in global markets. During that time, implied volatility increased, benefiting traders who bought straddles or strangles before tariff announcements. A similar situation could develop as the deadline approaches. From a technical perspective, the index’s struggle at the 200-hour moving average is significant. A sustained drop below 23,986 could prompt us to buy put options or create bear put spreads. This would be a defined-risk way to profit from further declines. However, the chance of a last-minute deal makes outright short positions risky. Buying out-of-the-money call options on the DAX is a cost-effective way to prepare for a potential surprise rally. This balances our approach to an uncertain situation. The difference between the German market and more stable indices like the UK’s FTSE 100 creates an opportunity. A pairs trade—going long on a FTSE 100 ETF while shorting a DAX ETF—could help hedge against broader market risks. This strategy focuses on the specific underperformance caused by tariff concerns. Create your live VT Markets account and start trading now.

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