European stocks started the month with a decline, as most indices slipped. The German DAX tried to bounce back mid-week but ended up falling by 0.85%, closing close to its weekly low. Daily losses were seen across major indices: the Stoxx 600 dropped by 0.2%, France’s CAC by 0.4%, the UK’s FTSE 100 by 0.1%, Spain’s IBEX by 0.6%, and Italy’s FTSE MIB by 0.9%. For the week, the Stoxx 600 was stable, down 0.2%, while the German DAX fell by 1.3%.

Weekly Market Performance

The French CAC saw a slight weekly gain of 0.1%, and the UK’s FTSE 100 rose by 0.2%. On the other hand, Spain’s IBEX went down by 0.7%, and Italy’s FTSE MIB decreased by 1.4%. Overall, the markets wrapped up the week in a dull state. This weak start to September suggests we should brace for more declines. With the German DAX and Italian FTSE MIB showing notable weakness, traders should think about protective strategies. A straightforward approach is to buy put options on the Euro Stoxx 50 or the DAX to protect against further drops. The VSTOXX Index, which tracks Euro Stoxx 50 volatility, surged over 15% this week, reaching 22.5, a level we haven’t seen since July. This increase in fear makes options more costly but reflects the rising uncertainty in the market. We think that paying a higher price for protection is sensible given the current situation. The DAX’s weak performance can be partly attributed to Germany’s latest manufacturing PMI, which stood at 48.5, indicating a second month of contraction. This economic slowdown, especially compared to the UK’s relative stability, may offer opportunities for pairs trades. We are considering shorting DAX futures while going long on FTSE 100 futures to benefit from this difference.

Inflation and Central Bank Policies

These movements stem from ongoing inflation concerns. August core inflation, as reported by Eurostat, remained stubbornly at 3.1%. This is putting pressure on the European Central Bank before its upcoming policy meeting. The market increasingly anticipates another rate hike, limiting any upside for stocks. This market behavior resembles the uncertain conditions we saw in late 2022, when central bank decisions heavily influenced trading. As September is usually a tough month for stocks, a major rally seems unlikely. Selling out-of-the-money call credit spreads to collect premiums fits our view of a sideways-to-down market in the coming weeks. Create your live VT Markets account and start trading now.

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