In July, a broad-based contraction was seen across sectors, with all sub-indices lower than June’s. The US experienced the sharpest decline, impacting the overall aggregate, amid reduced tariff-related inventory building.
The global aggregate PMI showed a 1.6-point fall led by the US, marking its steepest monthly drop since mid-2022. US PMIs contracted for the first time in 2025, attributed to reduced input buying and weakened demand for raw materials.
Bright Spots and Challenges
A bright spot was evident in Asia excluding China and Japan, with India leading globally. However, China and Japan saw reduced production volumes, Europe experienced its fifth month of growth, yet Germany faced its worst contraction since December.
Commodity prices remained steady in July amid deflation in China, with price hikes reported for electrical items. Stainless steel and aluminium shortages were notable, alongside the highest freight capacity shortages since April 2023.
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Given the sharpest monthly drop in the global aggregate PMI since mid-2022, we are positioning for increased market volatility in the coming weeks. The contraction in the US PMI for the first time this year is a significant warning sign for broad market indices. We are therefore considering buying put options on the S&P 500, especially after the latest US jobs report for July showed hiring slowing to 150,000, well below consensus forecasts.
European Market Divergences
The divergence within Europe, where Germany is contracting while the wider region grows, presents a specific opportunity. We see Germany’s weakness, confirmed by a recent 1.5% drop in July factory orders, as a drag on the entire Eurozone. This leads us to favour bearish positions on the German DAX index over other European markets.
In Asia, we must separate the leaders from the laggards. We are looking at bullish strategies, like call options on Indian market ETFs, as India continues to show global leadership in growth. Conversely, with China reporting deflation and lower production, we are exploring put options on China-focused ETFs, reflecting a pessimistic outlook reinforced by July’s industrial production figures coming in below 3%.
The specific shortages in stainless steel, aluminum, and freight capacity suggest targeted opportunities despite steady overall commodity prices. Freight capacity shortages, which the data shows are the worst since April 2023, are particularly notable, and we’ve seen the Freightos Baltic Index climb another 5% in the first week of August. This supports long positions on select shipping and logistics companies that can command higher prices.
Overall, the conflicting signals between regions and sectors point towards a complex trading environment. The wide gap between strong performers like India and weak ones like the US and Germany means broad index investing is risky. We believe this environment is better suited for options strategies that can profit from both specific downward moves and a general rise in market uncertainty, as reflected by the VIX index.
