Eurostoxx futures have gone up by 1.2% in the early hours of European trading. This boost in market confidence comes from the positive impact of the US-Japan trade deal. German DAX futures also show growth, rising by 1.1%. Meanwhile, UK FTSE futures have increased by 0.5%.

EU Trade Deal Concerns

There are still worries about the EU’s ability to finalize a similar deal by the August 1 deadline. This concern has grown since Japanese Prime Minister Ishiba resigned after losing in the upper house election, creating uncertainty about the agreement’s future. The current market rise provides a brief chance to take advantage of the positive mood. However, we think this optimism may not last, especially with the latest news from Japan. Traders might consider buying short-dated call options on the Euro Stoxx 50 to benefit from the short-term momentum. Ishiba’s resignation introduces significant political uncertainty that could threaten major trade agreements. We expect to see increased market volatility. The Euro Stoxx 50 Volatility Index (VSTOXX) is now at a relatively low level of 14.5, which has not held steady during past trade tensions. To benefit from the expected fluctuations, consider buying VSTOXX futures or straddles on the index.

Germany’s Economic Concerns

Germany’s economy is showing signs of weakness that the current DAX futures rally seems to overlook. The latest ZEW Economic Sentiment survey for Germany dropped to -11.4, reflecting ongoing pessimism among investors about the country’s six-month outlook. Therefore, we recommend buying put options on the DAX to protect against a possible market correction. We’ve seen this trend before during long trade negotiations, like the Brexit talks, which caused sharp and unpredictable swings in the FTSE 100 index. This historical context indicates that the market may be underestimating the risk of missing the August 1 deadline. A protective strategy using put spreads on key European indices would be a wise move in this situation. Create your live VT Markets account and start trading now.

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