US equity index futures pushed higher during European hours on Monday as risk appetite improved on reports of easing tensions between Washington and Tehran. Dow Jones futures rose 0.33% to about 52,400, while S&P 500 futures added 0.65% to roughly 7,450; Nasdaq 100 futures outperformed, up 0.90% near 29,630.
The move followed indications of a temporary pause in hostilities ahead of peace talks in Doha this week, after retaliatory strikes that began on Thursday when an Iranian projectile hit a cargo vessel. Delegations are due to meet in Qatar on Tuesday, even as both sides have accused the other of breaching the June 17 interim ceasefire. Attention is also on the Federal Reserve: the CME FedWatch Tool puts the probability of at least a 25-basis-point hike in December at 79.5%, with Thursday’s Nonfarm Payrolls expected to show June job growth of 114,000 and an Unemployment Rate of 4.3%. Last week, the Dow gained 0.6%, while the S&P 500 fell 1.95% and the Nasdaq Composite slid 4.6%; Nvidia and Alphabet dropped over 8%, Apple, Amazon and Meta lost more than 4%, and SpaceX sank 17% after its June 12 debut.
Short-Term Relief Rally and Options Strategies
With geopolitical tensions easing, we see an opportunity for a short-term relief rally, especially in the technology sector that was heavily sold off last week. We are considering short-dated call options on the Nasdaq 100 to capitalize on this rebound. The current upward move in futures suggests this positive sentiment could carry into the U.S. trading session.
The CBOE Volatility Index (VIX), often called the market’s “fear gauge,” has likely pulled back from its recent highs above 20 seen during last week’s conflict. A VIX trading closer to 17 makes buying options cheaper, presenting a favorable entry point for traders looking to hedge or initiate new positions. This drop reflects the market’s reduced anxiety over the Washington-Tehran situation, at least for now.
Upcoming Risks and Broader Market Outlook
Our immediate focus, however, is on this Thursday’s Nonfarm Payrolls report. A jobs number significantly above the 114,000 forecast could cement the Fed’s intention to hike rates, likely capping this rally. Historically, strong labor data during a tightening cycle has caused bond yields to rise and equity markets to fall, a risk we must manage heading into the report.
Last week’s rotation was severe, with the Nasdaq 100 underperforming the Dow Jones by over five percentage points. We view this week’s tech bounce as a potential opportunity to assess whether this trend will continue. We may look to buy puts on tech ETFs if this rebound shows signs of weakness ahead of the payrolls data.
Looking further out, the market pricing in a nearly 80% chance of a December rate hike suggests a structural headwind for equities. The U.S. 2-year Treasury yield, which is highly sensitive to Fed policy, is currently holding firm around 4.9%, reflecting these hawkish expectations. This environment leads us to consider selling out-of-the-money call spreads on the S&P 500 for the third quarter to generate income while defining our risk.
