There is little economic data expected today, with only the Dallas Fed Manufacturing index being released. It is known to be volatile and is not typically influential.
Attention remains on trade agreements as the August 1 deadline looms. A US-EU trade deal was agreed upon over the weekend, featuring a 15% tariff ceiling.
Trade Predictions And Outcomes
This outcome aligns with predictions that tariff rates will settle between 10-20%. This trade activity has been ongoing since April 9, approaching a high point.
The trend for risk assets is likely to continue without a new catalyst that could either heighten momentum or trigger a reversal.
With the economic calendar light, we see a market holding its breath. The CBOE Volatility Index (VIX) is currently trading near 13, well below its historical average of 20, which suggests a high degree of complacency among investors. This environment of low-cost options presents a unique opportunity before the next major catalyst hits.
Our focus shifts from the resolved US-EU trade situation to domestic inflation data. The upcoming Personal Consumption Expenditures (PCE) price index is the main event, as a recent report showed core PCE at 2.8%, still above the Federal Reserve’s target. A number that deviates from expectations could easily disrupt the current market calm and trigger a significant move.
Investment Strategy Considerations
For those who believe the current upward trend will continue, we see value in purchasing call options on broad market indices like the S&P 500. This allows for leveraged participation if favorable economic news extends the rally. Given the established risk-on sentiment, this remains the path of least resistance for now.
However, we think it is prudent to consider downside protection, as the article suggests a trend peak could be near. With volatility being so low, buying put options on key indices or specific stocks is relatively inexpensive. This acts as cheap insurance against a sudden reversal triggered by an unexpected data point.
The key takeaway is that a significant market move is more likely than a prolonged period of sideways trading. We should therefore consider strategies that profit from a spike in volatility itself, regardless of the direction. This could involve positioning in options that benefit from a breakout from the current tight trading range.
