Peter Navarro, US Trade Advisor, emphasises the difficulty in negotiating with the EU due to non-tariff barriers. He notes that the EU’s VAT tax acts as a subsidy, and calls for VAT tax relief alongside reduced tariffs to facilitate smoother trade.
Navarro acknowledges the complexity of finalising a trade deal with the EU, describing it as potentially the hardest one. Despite President Trump’s frequent frustrations, negotiations continue, with the current deadline of August 1 likely to be extended if an agreement remains elusive.
key market theme
Based on the comments from Mr. Navarro, we see continued friction and uncertainty in the US-EU trade relationship as a key theme for the market. This prolonged negotiation process, especially with it being labeled the “hardest one,” creates an environment where volatility is likely to rise unexpectedly. Derivative traders should be positioning for sudden price swings rather than a clear directional trend.
The stakes are incredibly high, with total U.S.-EU trade exceeding $1.3 trillion in 2023, making it one of the world’s largest economic partnerships. Given this massive volume, we believe specific sectors like German automakers and French luxury goods are particularly vulnerable to headline risk from these talks. Therefore, buying protective put options on ETFs that track the DAX or CAC 40 indexes could be a prudent way to hedge against negative surprises.
volatility and opportunity
The mention of the former president’s frustration suggests that sharp, market-moving rhetoric could emerge with little warning. Historically, during the 2018 trade disputes, the VIX index repeatedly spiked above 20 on similar announcements, rewarding those who were long volatility. We think buying VIX call options or futures ahead of any known negotiation deadlines is a direct way to profit from the anticipated anxiety.
This ongoing tension will also weigh on the EUR/USD currency pair, which has been sensitive to political developments. The back-and-forth nature of the talks, with deadlines that may be extended, creates a choppy environment. Traders could consider using options strategies like straddles, which profit from a significant price move in either direction, to capitalize on a potential breakout from the current range.
We should be using the calendar to our advantage, focusing on options expirations that surround key dates like the August 1 deadline mentioned. Even if the date is pushed back, the weeks leading up to it will likely see increased speculation and market chatter. Structuring trades with weekly or monthly options allows for a more tactical response to the flow of news from these difficult negotiations.
