European stock markets are maintaining their gains from last week. German DAX futures have increased by 0.3%, while UK FTSE futures remain unchanged.
European Equities Anticipating Momentum
European equities are anticipating continued momentum. This largely depends on the actions of the Federal Reserve in the coming days. Additionally, US futures are showing stability, with S&P 500 futures inching up by 0.1% as European markets open.
We are seeing a slight rise in European and US futures, but this is a cautious market holding its breath. The small gains in the Eurostoxx and S&P 500 futures reflect uncertainty, not strong conviction. All eyes are on the Federal Reserve’s interest rate decision later this week, which will set the tone for the next several weeks.
This nervousness is justified, as the latest data from late August showed US core inflation was stickier than expected at 3.4%, slightly above the 3.2% consensus. This has created genuine debate over whether the Fed will signal one more rate hike for the year or confirm a sustained pause. For traders, this means the risk of a sharp move in either direction is elevated.
Given this setup, we are seeing the VIX, a measure of expected market volatility, creep up to 18 from the low of 14 it hit a few weeks ago. This suggests traders should consider strategies that profit from a large price swing, regardless of direction. Buying options that expire after the Fed’s announcement could be a prudent way to position for the expected turbulence.
ECB Decision Adds Pressure
The European Central Bank’s decision to hold rates last week adds another layer, as they often follow the Fed’s lead. If the Fed remains hawkish, it puts pressure on the ECB and could weigh on European equities like the DAX, which has recently struggled to break past key resistance levels. Therefore, the Fed’s tone is just as important for European derivatives as it is for US ones.
Looking back, we saw similar patterns throughout 2023, where markets would drift aimlessly in the days leading up to an FOMC meeting. These periods were often followed by significant moves once the central bank’s statement was digested. The key is to not get caught in the pre-announcement chop but to be positioned for the volatility that follows.
