European markets experienced a subdued session, with equities losing some early gains as market participants processed US data and tariffs. In currency movements, the dollar declined slightly, with EUR/USD approaching 1.1600, and GBP/USD marginally higher at 1.3313. The AUD and NZD led gains, each rising 0.5% to 0.6500 and 0.5930 respectively.
European indices opened positively but pared back, with the DAX and CAC 40 up by 0.1% and 0.2%. S&P 500 futures also gained 0.2%, though they had reached 0.5% earlier. In the bond market, US 10-year Treasury yields increased by 3.2 basis points to 4.227%.
Commodity Market Movements
Commodities saw gold decrease by 0.5% to $3,365.13, nullifying earlier gains, while WTI crude rose 1.5% to $66.13, rebounding from its 100-day moving average of $64.97. With no major data expected in US trading, the focus is shifting to the upcoming US CPI report. Elsewhere, Eurozone retail sales increased 0.3%, while Germany’s industrial orders dropped 1.0%. South Korea is in discussions with US financial authorities regarding foreign exchange.
With markets in a holding pattern today, we see this quiet period as an opportunity to position for what comes next. The real focus is not on today’s minor moves but on next week’s US CPI report. The market is waiting for this key inflation data before making its next significant move.
This lull feels similar to periods we saw in 2023, when the VIX index would dip below 15 just before a major economic report caused a volatility spike. Given the current quiet, implied volatility is relatively cheap, making it a good time to buy options. We think buying volatility through straddles or strangles on major indices ahead of the CPI data could be a prudent strategy.
Recent disappointing US data, especially the weak ISM services PMI and the dismal labor report, suggests a clear downside risk to equities. The latest non-farm payrolls data from last month showed a significant slowdown, a sharp contrast to the stronger job growth we saw for much of 2024. Therefore, buying protective put options on the S&P 500, with expirations after the CPI release, could be a smart hedge against a negative surprise.
Currency Market Positioning
In the currency market, the dollar’s weakness today could easily reverse if inflation comes in hot, forcing the Fed’s hand. A long strangle on EUR/USD, which involves buying both an out-of-the-money call and put option, could pay off if the pair makes a large move in either direction following the data release. This positions us to profit from a breakout without having to predict the direction.
Commodities are also keyed into the inflation outlook, with gold pulling back slightly from its very high price of $3,365. We see this as a potential entry point to buy call options on gold, as a poor economic outlook from the CPI data could trigger another flight to safety. For oil, while it bounced off a technical support level, its direction will ultimately be tied to the global growth sentiment set by next week’s US report.
The moves we are seeing today are likely just noise as the market bides its time. The critical task for the coming days is to build positions that will benefit from the market’s reaction to the US inflation numbers. This single report will likely dictate market sentiment and direction for the rest of the month.
