European equities have shown marginal recovery as the new week begins. The Eurostoxx is up by 0.3%, Germany’s DAX and France’s CAC 40 both rose by 0.3% and 0.4% respectively, while the UK FTSE increased by 0.2%.<\/p>\n
Spain IBEX and Italy’s FTSE MIB climbed by 0.4% and 0.9%. US futures are stabilising, with S&P 500 futures gaining 0.5% amidst hopes for potential Federal Reserve rate cuts following disappointing jobs data.<\/p>\n
Swiss stocks have opened lower, with the SMI decreasing by 1.8%. This is due to catching up, as it was a holiday in Switzerland on Friday, causing it to miss last week’s declines.<\/p>\n
After the plunge last Friday, we are seeing a sliver of a bounce in European equities and US futures this morning. The market is attempting to flip the narrative from “terrible jobs data is bad for the economy” to “terrible jobs data means the Fed will cut rates soon”. This shift in thinking is creating immediate opportunities in the derivatives market.<\/p>\n
The market shock came from the U.S. jobs report for July 2025, released last Friday, which showed Non-Farm Payrolls grew by only 65,000, missing expectations of 190,000 by a wide margin. The unemployment rate also ticked up unexpectedly to 4.1%, its highest level in over two years. This data was the first major crack we have seen in the otherwise resilient labor market.<\/p>\n
In response, the CBOE Volatility Index (VIX) spiked above 20 on Friday, a level not consistently seen since early this year. Traders should now watch for opportunities to sell volatility through options on the VIX or VIX futures, betting that the initial panic will subside as the market embraces the rate cut narrative. This strategy, however, carries risk if Friday\u2019s data signals the start of a genuine recession.<\/p>\n
The most direct response is in interest rate derivatives, where the focus is now squarely on the Federal Reserve’s September meeting. Fed fund futures are now pricing in a nearly 80% chance of a 25-basis-point rate cut, a dramatic shift from just a week ago when the odds were below 20%. Traders will be actively buying SOFR and Fed fund futures contracts to position for this expected policy change.<\/p>\n
For equity index traders, this creates a classic “Fed put” scenario, where the central bank is expected to support markets. One strategy we are seeing is the selling of out-of-the-money put spreads on the S&P 500. This is a bet that while the economy may be slowing, the prospect of lower rates will provide a floor under equity prices and prevent a deeper sell-off.<\/p>\n
We have seen this playbook before, most notably in late 2023 when weakening economic indicators began to trigger market rallies on the expectation of a policy pivot. That period showed how quickly markets can look past bad news when monetary easing is on the horizon. This historical precedent is giving traders confidence to bet on a similar outcome now.<\/p>\n
The main risk is that we are misreading the Federal Reserve’s intentions, as core inflation remains stubbornly above 3%. The Fed could prioritize its inflation fight over a slightly weakening labor market, invalidating the “bad news is good news” thesis. Therefore, holding some protection, perhaps through long-dated puts, remains a prudent hedge against this optimistic view being wrong.<\/p>\n
Create your live VT Markets account<\/a>\u00a0and\u00a0start trading<\/a>\u00a0now. <\/b><\/p>\n","protected":false},"excerpt":{"rendered":" European stocks edge higher; US futures rise on rate-cut hopes; Swiss SMI drops after Friday holiday.<\/p>\n","protected":false},"author":62,"featured_media":16994,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[59],"tags":[],"class_list":["post-28088","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-live-updates"],"acf":{"acf_article_selection_author":null},"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\n\n\t\t