Questions On Trump Tariffs
We are seeing a slight relief rally in European stocks like the DAX and CAC 40, but we shouldn’t get too excited. US markets are closed today for the Labor Day holiday, meaning this move is happening on very thin volume. The real test will come when Wall Street reopens tomorrow and decides if it agrees with this optimism.
The market is reacting to whispers that the Trump administration’s tariffs might be reconsidered, which is the main driver of uncertainty. However, the Euro VSTOXX volatility index, a key measure of market fear, is still elevated, sitting just over 20, well above its long-term average. This tells us that options traders are still betting on big price swings in the weeks ahead, not a smooth ride higher.
We saw this exact pattern play out during the trade disputes back in 2018 and 2019, where rumors caused sharp but temporary rallies. This recent bounce comes even as the latest data showed German factory orders fell 1.1% in July, highlighting the real economic damage from trade friction. Therefore, this market remains vulnerable to any negative headlines.
Protecting Against Downside
For the coming weeks, a prudent strategy is to protect against the downside. Buying put options on major indices like the Eurostoxx 50 offers a cheap way to hedge existing long positions. This allows us to participate in any potential upside if the tariff news proves true, while putting a floor under our portfolios if sentiment sours again.
Given the underlying economic weakness and geopolitical tension, selling out-of-the-money call options could also be a smart play. This strategy allows us to collect premium from the elevated volatility, betting that any rally will likely be capped. It’s a way to get paid while we wait for more clarity on the trade front.
