European stock markets showed little movement as the week and month drew to a close. The Eurostoxx fell by 0.1%, Germany’s DAX remained flat, and France’s CAC 40 also decreased by 0.1%.
The UK’s FTSE and Spain’s IBEX saw a drop of 0.1% and 0.2% respectively, while Italy’s FTSE MIB stayed unchanged. Overall, August was a positive month for stocks, except for France’s CAC 40, which was affected by domestic political issues earlier in the week.
US Market Response
In the US, futures were subdued, with S&P 500 futures down by 0.1%, as traders focused on month-end activities. Despite the subdued performance, the general trend for August remained upward for most European indices.
We are seeing a predictable pause in European markets, which is normal for month-end positioning after a solid run. August’s gains were fueled by cooler-than-expected inflation data from earlier in the month, but that momentum is now fading. This quiet end to the week feels like the market is taking a breath before the historically volatile autumn period.
The recent rally has pushed implied volatility to very low levels, with the VSTOXX index, which measures Eurostoxx 50 volatility, hovering near 14. This is a level of complacency we haven’t seen for over a year, making options protection look cheap. Heading into September, which has been the worst-performing month for the S&P 500 on average since 1950, buying portfolio insurance seems prudent.
Investment Strategies and Market Outlook
We see value in buying out-of-the-money puts on broad European indices as a hedge against a seasonal downturn. The specific weakness in France, stemming from the political uncertainty after their recent elections, makes the CAC 40 a prime candidate for bearish positions. The current low premiums on these options present a favourable risk-reward setup for a potential pullback.
Looking at the US, the muted tone of the futures market reflects the Federal Reserve’s hawkish commentary from the Jackson Hole symposium last week. With fed funds futures pricing in only a 25% chance of a rate cut before the end of 2025, upside appears limited. This environment supports strategies like selling call spreads on the S&P 500 to capitalize on range-bound trading in the weeks ahead.
