European markets opened slightly up today, bouncing back from a drop yesterday. Eurostoxx, Germany’s DAX, and France’s CAC 40 each gained 0.2%. The UK’s FTSE and Spain’s IBEX stayed nearly unchanged, while Italy’s FTSE MIB saw a 0.1% increase. The EU and US will continue their trade talks as the deadline of August 1 approaches. Reports suggest that progress is crucial to resolve existing differences. Meanwhile, all eyes are on the upcoming US Consumer Price Index (CPI) report, with S&P 500 futures up 0.3%.

Preparing For Repricing

The current quiet in the market is misleading, signaling a need to prepare for a major risk price adjustment. While cash indices show little movement, the real action is in the derivatives market. Instead of guessing market direction, it’s wise to buy the underpriced volatility. The CBOE Volatility Index (VIX) has been calm, hovering around a low 13. This tranquility seems disconnected from broader economic events, creating an opportunity. Options are cheaper when the VIX is low, which we see as a bargain for portfolio insurance and speculative chances ahead of known events. All eyes are focused on the upcoming US CPI report. Markets have proven sensitive to even a small deviation from expectations. The last report showed headline inflation at 3.3%, which was slightly lower than expected, causing asset values to spike on hopes of an earlier change from the central bank. We anticipate a similar, if not larger, market reaction this time. If inflation comes in above 3.5%, Fed fund futures could drop sharply, leading to a sell-off of risk assets. On the other hand, a lower number might lead to a significant rally. Our strategy is not to bet on the exact number but to set up trades, like straddles on the SPX or NDX, to capitalize on the expected volatility following the report.

Trade Dispute Dynamics

In addition to the immediate market movements, the ongoing trade dispute could have long-term effects. We’ve seen this before during the US-China trade war in 2018-2019 when markets reacted strongly to news and rumors. A single tweet could wipe out gains from an entire week. The current stalemate, especially on green-tech subsidies and older tariffs, places some sectors at risk. We are considering longer-dated puts on European auto sector ETFs and possibly calls on US industrial companies that would benefit from protectionist policies. It’s important to view this situation not just as a single event on August 1, but as a prolonged source of sector-specific volatility that will create opportunities for pairs trades and relative value strategies long after the CPI data is released. Create your live VT Markets account and start trading now.

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