The European Union has announced that a 15% tariff rate will be applied comprehensively. This tariff includes Section 232 tariffs, excluding only steel and aluminium. The tariff will cover cars, car parts, and pharmaceuticals, pending the conclusion of an investigation by the United States.
The EU states that the joint statement with the US is prepared, awaiting a response from the US side. The agreement is described as a framework for a trade deal, offering immediate relief but not being legally binding. This framework approach mirrors strategies seen with other countries like China, the UK, and Japan.
Opportunities For Price Swings
The new framework deal with the US, while seemingly offering relief, is not legally binding. This means the situation can change quickly, creating a perfect environment for volatility. We should be looking at options strategies to capitalize on potential price swings in the coming weeks.
We have seen European automaker stocks like Volkswagen and Stellantis rally through July on hopes of a deal. However, this 15% tariff still impacts margins on the over €40 billion in vehicles we saw exported to the US in 2024. We should consider buying put options on major European auto ETFs as a hedge against the market fully pricing in this new cost.
The EUR/USD currency pair will likely remain volatile but range-bound in the near term. We saw a brief spike towards 1.09 on the initial announcement, but the non-binding nature of the deal creates a firm ceiling. Traders could use strangles or straddles on the currency pair to play this choppy price action without betting on a specific direction.
Risks In The Pharmaceutical Sector
We need to keep a close eye on the pharmaceutical sector, as the deal leaves it exposed to future tariffs pending a US investigation. With EU pharmaceutical exports to the US exceeding €65 billion last year, any new duties would have a major impact. Buying long-dated put options on European health care indices could be a prudent move to prepare for this future risk.
This type of conditional agreement tends to increase overall market nervousness. We’ve seen Europe’s main volatility index, the VSTOXX, drift down to a low of 14 in late July, which now seems complacent given the uncertainty. We believe buying VSTOXX futures or call options is a relatively cheap way to insure a portfolio against a breakdown in these talks.
