Eurostoxx futures are up by 0.3% in early European trading, following a strong night on Wall Street. German DAX futures have risen by 0.4%, French CAC 40 futures by 0.3%, and UK FTSE futures by 0.2%. US indices closed at record highs, boosting European stocks. However, market sentiment is cautious; US futures are flat, with S&P 500 futures showing no change.

European Futures Show Limited Enthusiasm

A full risk-on wave has not yet taken over the broader markets today. We see a small rise in European futures this morning. However, this rally lacks strong support. The positive atmosphere mainly comes from Wall Street’s record highs, but flat S&P 500 futures indicate a pause in momentum. This suggests a more careful approach instead of a full risk-on sentiment. This caution is reasonable, especially with central bank discussions expected in the next two weeks. Recently, the US Core PCE Price Index for July came in at 2.9%, slightly above expectations. This persistent inflation could lead to further policy tightening by the Federal Reserve, which might disrupt the current calm in equity markets. From a derivatives perspective, the VIX index is low at around 14. This points to a level of market complacency, especially with major indices near all-time highs. Historically, such low volatility can be a good time to buy protection in case an unexpected event causes a market spike.

Strategic Insights for Traders

Given this situation, traders may want to consider strategies that could benefit from rising volatility or a market pullback. Buying put options on major indices for downside protection could be a smart move. We’ve observed that put-call skew is gradually increasing, indicating that some traders are already anticipating a higher chance of a decline. We should remember the sharp correction in the fourth quarter of 2024, which followed a similar phase of record highs and low volatility. That time serves as a reminder of how rapidly market sentiment can change, and the current environment shows some of those early warning signs. In the coming weeks, we’ll closely monitor trading volumes as we are in mid-August. The lower liquidity typical for this period can lead to larger price swings due to unexpected economic data or geopolitical news. In this environment, being agile and having hedges in place is essential. Create your live VT Markets account and start trading now.

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