The tariff rate imposed by Trump has been set at 30%. This applies to EU imports starting from 1 August.
The European Union has proposed retaliatory tariffs on U.S. goods valued between €72-84 billion. However, these have been delayed as both parties are interested in negotiations.
Importance Of The Coming Weeks
The next few weeks are essential to avoid any further escalation in trade tensions. While both the U.S. and EU have indicated their readiness to negotiate, effective and unified action from the EU will be necessary.
We see this as an immediate repricing event for cross-Atlantic risk. The market has been complacent, and this letter from his administration is the catalyst. Volatility is now the primary asset to own. With the VIX hovering in the low teens recently, we view this as a floor. Look back to the 2018-2019 trade escalations with China; the VIX regularly spiked above 25 on tariff announcements. We expect a similar pattern here. The clear play is buying front-month VIX calls or long-dated straddles on the S&P 500. You are not betting on direction, you are betting on disruption.
The focus sharpens on specific European sectors. With over $550 billion in goods exported from the EU to the U.S. in 2023, the exposure is massive. German automakers are in the direct line of fire. Their exports of vehicles and parts to the U.S. represent a significant chunk of that total, running into the tens of billions. We believe put options on the DAX index are underpriced. Similarly, implied volatility on European luxury goods and industrial machinery ETFs should be bought. The threat of retaliation from Brussels puts a target on American technology and agricultural exports. Hedging long positions in the Nasdaq 100 with puts is now a prudent cost of doing business for the next month.
Positioning Strategy
This is not a one-way trade. The mention of ongoing progress in negotiations is designed to create a whipsaw. A sudden announcement of a deal, however flimsy, could spark a violent relief rally. This reinforces the long-volatility stance over a purely bearish one. Any trader heavily short could be carried out. The strategy, therefore, is to be positioned for sharp moves in either direction. The next few weeks will not be about fundamentals; they will be about parsing headlines and managing gamma exposure as deadlines approach.
