Trump Calls for 100 Tariffs from EU
Our immediate response should be to prepare for a surge in market volatility. We should be buying calls on volatility indexes like the VIX and Europe’s VSTOXX, as this level of geopolitical risk is not priced into the market. This situation is reminiscent of the initial 2018 tariff escalations, which saw the VIX more than double in less than two months.
We need to hedge our European exposure, particularly in Germany’s export-driven economy. Buying put options on the German DAX index or on ETFs tracking European automakers is a logical move, as China was the EU’s second-largest trading partner in 2024 with goods trade valued at over €700 billion. Germany’s economy was already showing signs of weakness throughout last year, and this could be the catalyst for a severe downturn.
Strategies Against Asian Markets
Similar defensive positions should be taken against Asian markets. Protective puts on China’s A50 index and India’s Nifty 50 are warranted given the direct threat to their export sectors. India’s economy, which was projected to grow over 6% this year, is especially vulnerable to any disruption in its expanding trade relationship with the EU.
In currency derivatives, the clear trade is to be long the U.S. dollar against the euro, the offshore Chinese yuan, and the Indian rupee. We anticipate a flight to safety that will strengthen the dollar significantly. Buying puts on currency futures for the EUR or INR offers a direct way to position for their expected weakness in the coming weeks.
We cannot overlook the “mirror” tariff threat to American companies. This makes broad short positions on the S&P 500 risky, so we should instead focus on buying puts on specific U.S. tech and retail giants with heavy reliance on Chinese supply chains. Corporate disclosures from 2024 showed that over one-fifth of S&P 500 companies listed this reliance as a primary operational risk.
