Eurostoxx futures have increased by 0.3% in early European trading, following strong performance in Wall Street overnight. German DAX futures have risen by 0.4%, French CAC 40 futures by 0.3%, and UK FTSE futures by 0.2%.
US indices closed at record highs, influencing European equities towards similar gains. Despite this, overall market sentiment remains cautious, with US futures currently muted, as S&P 500 futures show no change.
European Futures Lack Strong Conviction
A full risk-on wave has not yet emerged across broader markets today.
We are observing a slight lift in European futures this morning, but this rally lacks strong conviction. The positive mood is mostly a spillover from Wall Street’s record highs, yet the flat S&P 500 futures suggest that momentum may be pausing. This indicates a cautious approach is warranted rather than a full risk-on sentiment.
The caution is understandable given the upcoming central bank commentary expected in the next two weeks. We just saw the latest US Core PCE Price Index data for July come in at a stubborn 2.9%, slightly above expectations and a key metric for the Federal Reserve. This persistent inflation keeps the possibility of further policy tightening on the table, which could disrupt the current calm in equity markets.
From a derivatives standpoint, the VIX index is currently trading at a low level around 14. This suggests a degree of market complacency, especially with major indices hovering near all-time highs. We have historically seen that such low volatility readings can be opportune moments to purchase protection before an unexpected market catalyst causes a spike.
Strategic Considerations For Traders
Considering this, traders might look at strategies that benefit from a potential increase in volatility or a market pullback. Acquiring some downside protection through put options on major indices could be a prudent move. We’ve noted that put-call skew has been gradually ticking up, showing that some traders are already pricing in a higher probability of a decline.
We must remember the sharp, unexpected correction that occurred in the fourth quarter of 2024, which also began after a period of record highs and low volatility. That period serves as a recent reminder of how quickly market sentiment can shift. The current setup shares some of those early warning signs.
In the immediate weeks, we will be watching trading volumes closely as we are in the middle of August. Thinner liquidity common during this period can amplify price swings on any unexpected economic data or geopolitical news. This environment favors being nimble and having hedges in place.
