European equities experienced an uplift as markets opened, reflecting relief over a US-EU trade deal. The Eurostoxx increased by 1.0%, Germany’s DAX by 0.8%, and France’s CAC 40 by 1.1%. Meanwhile, the UK FTSE rose by 0.4%, and both Spain’s IBEX and Italy’s FTSE MIB climbed by 0.8%.
The EU has conceded to avoid the worst-case scenario, accepting a “temporary” agreement. Lawmakers are determined to seek improved terms, but the current deal might last throughout Trump’s presidency. Presently, a baseline of 15% tariffs seems to be established, with further details awaited.
Relief Rally
We view the current market jump as a relief rally, not a fundamental shift in risk. The agreement is explicitly called “temporary” by lawmakers, which signals a high probability of future friction and renegotiation. Derivative traders should use this strength to position for a return of volatility rather than chasing the rally.
The Euro Stoxx 50 Volatility Index (VSTOXX), Europe’s main fear gauge, has dropped toward the 17 level on this news, making options pricing relatively cheap. Historically, periods of complacency following a trade headline have provided excellent opportunities to buy protection. We believe purchasing puts or straddles on the Eurostoxx 50 or the DAX offers a cost-effective way to profit from the instability we anticipate.
The 15% baseline tariff will still compress margins for key European exporters, especially in the automotive sector, which sends over $40 billion in goods to the U.S. annually. Given that European carmakers like Volkswagen and BMW were facing threats of even higher levies, this deal is merely the lesser of two evils and not a cause for sustained celebration. We see opportunities in bearish positions on specific auto stocks that are rallying too hard on this news.
Future Uncertainty
Past experience with trade deals under the former president shows that initial agreements are often just starting points for further conflict. Lawmakers have already signaled their intent to push for better terms, creating a clear catalyst for future headlines that could easily erase these gains. We should therefore treat this calm as a temporary window to prepare for the next round of uncertainty.
