Yesterday was the most eventful day of the week for economic data releases. Today, focus is limited to the German IFO and US Durable Goods Orders data.
These releases are expected to have minimal impact on central banks or market directions. Additional low-tier releases include the ECB’s money supply data and Italian Business Confidence.
Upcoming Economic Events
Next week promises more activity with key economic releases, such as the NFP and a tariffs deadline on Friday. Anticipation grows for more trade deals throughout the week.
We see this period of calm as an opportunity to prepare for incoming volatility. The CBOE Volatility Index, or VIX, has recently traded below 15, which is historically low and suggests complacency in the market. This makes it a relatively inexpensive time to buy options contracts as a hedge or speculative play before the key events arrive.
The approaching employment data is the main focus, with economists forecasting the creation of approximately 185,000 jobs. A significant beat or miss on this number will almost certainly move markets and alter expectations for the central bank’s next move. We have seen in the past that a surprise of 75,000 jobs or more can cause a 1-2% swing in index futures within the first hour of the release.
Trade Policy Considerations
Similarly, we must position for binary outcomes related to trade policy. Any news, positive or negative, regarding the tariff situation can cause sharp, sudden price gaps, especially over a weekend. A neutral options strategy, such as a straddle, could be considered to profit from a large price swing in either direction without needing to predict the outcome of the talks.
Given the lull before these catalysts, we believe it is wise to use this time to assess risk. Reducing exposure or purchasing protective put options on broad market ETFs can insulate a portfolio from a negative shock. This is essentially buying insurance when it is cheap, ahead of a week where the outcome is highly uncertain.
