European markets showed strong resilience this week, even with fiscal challenges in France and the European Commission’s Excessive Deficit Procedure affecting eight countries, including Finland. The 10-year bond spreads in France compared to German Bunds narrowed to near their lowest point since mid-September, signaling positive sentiment toward European government bonds. Spain and Italy’s bond spreads have fallen to levels not seen since before the eurozone debt crisis. The US’s 28-point “Peace Plan” for the Ukraine-Russia conflict has pushed diplomatic efforts forward, with Europe quietly redefining certain goals. Notably, a clause concerning frozen Russian assets managed by the US was left out.

Economic Implications of Frozen Russian Assets

If this change stays in place, Europe keeps a powerful economic tool and funding source for Ukraine’s rebuilding efforts. Euroclear has cautioned that such actions may be viewed as “confiscation,” which could unsettle markets and raise risk premiums for European assets. Europe faces several ongoing challenges, such as slow decision-making, delayed defense improvements, and conscription disputes. This suggests that continued support for Ukraine might be the most practical route, despite the rising costs. Despite France’s fiscal issues and the European Commission’s deficit warnings, European markets are surprisingly strong. This week, the 10-year French spreads over German Bunds narrowed to just 55 basis points, down sharply from over 80 basis points during the summer’s political uncertainty. This indicates that investors no longer see a high-risk premium on French debt. The calm in these markets is keeping volatility low, with the VSTOXX index—measuring Eurozone equity volatility—dropping below the important level of 15. For derivative traders, this makes selling options to earn premium appealing. However, this low volatility may not persist if geopolitical events change suddenly.

Market Insights and Hedging Strategies

Optimism is also evident in currency markets, where the EUR/USD has bounced back from its autumn lows and is challenging the 1.0850 level. Traders appear to be unwinding hedges placed earlier in 2025, showing increased confidence in the Eurozone’s stability. Tightening credit spreads in peripheral countries, like Italy and Spain—now at pre-2012 debt crisis levels—further support this positive outlook. A key factor driving this optimism is the diplomatic progress regarding the US-led peace plan for Ukraine, particularly the omission of the clause about frozen Russian assets. If this change stands, Europe will maintain a significant economic advantage and a potential funding source for Ukraine’s reconstruction, easing the immediate financial burden on member states and boosting investor trust. However, traders need to remain cautious about the situation with Russian assets. While retaining control is beneficial, any effort to confiscate these funds could be interpreted as a default, which might increase risk premiums across all European financial assets. This uncertainty is a risk that makes purchasing inexpensive, long-dated put options a reasonable hedging strategy against the current calm in the market. Traders should plan for short-term stability while staying protected against sudden disruptions. Selling short-dated credit default swap (CDS) protection on peripheral European nations can take advantage of tight spreads and positive sentiment. This strategy can be complemented by buying longer-term volatility in case diplomatic situations shift. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now