The EU Trade Commissioner, Sefcovic, is set to hold discussions with US Trade Representative, Greer, this evening. The EU has confirmed there will be no implementation of any trade countermeasures before August 1.
German Chancellor Merz is seeking a swift resolution, maintaining close communication with Trump and Von Der Leyen. While the EU is currently withholding countermeasures, it is prepared to respond if necessary.
Market Reactions To Tariffs
The threat of a 30% tariff on the EU has been largely brushed off by the markets due to the August 1 deadline. Markets initially dropped but ended with gains, as people are accustomed to Trump’s threats.
There is a prevailing expectation that deadlines will be postponed, and eventual agreements will be made. Trump’s threats are perceived as ineffectual unless tariffs are introduced without delays, which would provoke market unrest and potential retaliations.
The market’s collective yawn is precisely our cue. While cash equity traders seem content to buy the dip based on reassurances from Merz and the EU spokesperson, the derivatives market offers a more nuanced way to play this. The current complacency, born from the “TACO trade” fatigue, has crushed implied volatility. We see the VIX index, for instance, flirting with a 13-handle, a level that historically suggests an almost complete disregard for near-term shocks. This is a gift.
Mispricing The Probability
Our view is that the market is mispricing the probability of a policy accident. Everyone is focused on the August 1 deadline, expecting a predictable, drawn-out negotiation between Greer and Sefcovic. The real risk, however, is not a scheduled event but an impulsive one. We saw this playbook repeatedly between 2018 and 2019, where a single tweet could erase a week of gains. During that period, markets saw an average dip of 1.5% in the 24 hours following a new tariff threat, but the complacency of today is far greater than it was then.
Therefore, we are not interested in the crowded trade of selling volatility. The premium collected is simply not worth the risk of a sudden reversal. Instead, the smart money is buying cheap, out-of-the-money protection. While the VIX is low, we’re seeing signs of nervousness under the surface. The CBOE Skew Index, which measures demand for protection against “black swan” events, has been quietly ticking up, recently touching 138. This indicates that while most are selling options, a few large players are buying “lottery ticket” puts just in case.
Our strategy for the next two weeks is to exploit this disconnect. We are structuring trades that profit from a sudden spike in volatility rather than a directional move. This involves buying August and September call options on the VIX and purchasing far out-of-the-money put option spreads on indices most sensitive to this trade, particularly Germany’s DAX. The cost of entry for these positions is exceptionally low right now. The market is pricing in the rational, deal-making Trump that Von Der Leyen and Merz hope to engage with. It is not pricing for an unpredictable leader who uses tariffs as a disruptive tool just to demonstrate resolve. The bigger the yawn from the market, the wider our eyes should be.
