Insights 
VT 
France is encouraging EU nations to employ the so-called “trade bazooka” against the US. This move follows dissatisfaction with what France perceives as an unfair trade deal.
The EU Anti‑Coercion Instrument, Regulation 2023/2675, is a versatile tool. It allows the EU to detect and counteract economic coercion from external countries.
Focus of Regulation 2023/2675
Regulation 2023/2675 focuses on trade, investment, services, public procurement, and intellectual property rights. It ensures that responses are targeted, proportionate, and aligned with international law.
Given the French president’s push to deploy the EU’s trade weapon against the US, we believe traders should prepare for a significant spike in market volatility. The forceful rhetoric against what he deems “unfair” trade practices introduces a new layer of geopolitical risk. This uncertainty is a direct catalyst for turbulence in cross-asset derivatives.
We should anticipate increased choppiness in the EUR/USD currency pair, which is the most direct proxy for this tension. Traders could consider buying straddles or strangles on the pair to profit from a large move in either direction, regardless of the outcome. Historically, even the threat of trade sanctions between these blocs has caused sharp, unpredictable price swings.
Impact on Major Sectors and Market Volatility
The stakes are incredibly high, with US-EU trade in goods and services exceeding $1.3 trillion in 2022. Key sectors like automotive, aerospace, and luxury goods are directly in the line of fire. We advise looking at protective put options on exchange-traded funds tracking European automakers or the broader CAC 40 index.
This situation echoes the 2018-2019 trade disputes, which saw heightened volatility and risk aversion. During that period, implied volatility on major indices rose sharply before any tariffs were even enacted. We expect a similar front-running of risk, where the fear of the “anti-coercion” instrument being used is enough to move markets.
The European VSTOXX volatility index, which recently hovered near 13, is currently priced for relative calm. This presents an opportunity to buy call options on the index as a cheap hedge against a breakdown in trade relations. If his push gains traction within the EU, this index could see a rapid repricing higher.
Because this new legal tool is untested against a partner as large as the United States, its potential use creates profound uncertainty. This could weigh on European equities more than US ones initially, as markets dislike ambiguity. Therefore, structuring positions that are net short European indices versus being long US ones could be a prudent strategy.
