European stocks started the week slowly, showing a cautious mood. The Eurostoxx, Germany’s DAX, France’s CAC, and Spain’s IBEX all dropped by 0.4%, with Italy’s FTSE MIB falling by 0.2%. Despite these losses, the DAX is still up a bit for the month. Spain and Italy’s main indices are close to their highest levels in nearly 20 years. The UK markets are closed today, making for a quieter atmosphere in London. In the US, S&P 500 futures fell slightly, down by 0.1%.

Cautious Start to the Week

European markets began the week with caution, hinting it’s time to reassess our positions. Since indices in Spain and Italy are near highs last seen before the 2008 financial crisis, it’s wise to think about protective strategies. Consider buying put options on the Eurostoxx 50 or individual indices like the FTSE MIB to safeguard some of this year’s significant gains. This cautious outlook suggests that market volatility may be rising after a stable period. The VSTOXX, which tracks Eurozone equity volatility, increased to 16.2 this morning—up from the low of around 14 earlier this month. We can use VSTOXX futures or options to prepare for potential market turbulence in the upcoming weeks. This market pullback follows last week’s Eurozone CPI data, which was at 2.8%, slightly higher than expected and still above the ECB’s target. This puts pressure on the European Central Bank ahead of its September meeting and raises concerns about another rate hike. Such uncertainty may limit any significant gains for stocks in the short term.

Strategies Amid Uncertainty

The German DAX is still holding onto its small monthly gains, but we must remain aware of the recent 1.3% drop in German manufacturing orders. This downturn in Europe’s largest economy contrasts with the recent market highs, hinting at possible vulnerabilities. A pairs trade, where we buy a more stable index and sell the DAX, might be a good approach. As the month ends and with London on holiday, liquidity is lower, which can lead to larger market swings. Now is the time to be cautious, not to make large directional bets. Selling out-of-the-money call options, known as covered calls, could help us earn extra income from our existing long positions while waiting for clearer market signals. Create your live VT Markets account and start trading now.

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