EU trade commissioner Sefcovic is in talks with Lutnick and Greer to implement a framework agreement. Their goal is to include as many products as possible on a list exempt from tariffs. However, not all tariff issues have been resolved, and some challenges are anticipated in the discussions.
The framework agreement, established before 1 August, is a temporary measure. It allows for ongoing negotiations to refine each side’s positions. Comparisons have been drawn with the existing arrangement between the US and China. The long-term implications for the EU in securing favourable terms with the US remain uncertain.
Rising Volatility in Trade Talks
The recent comments about potential “turbulence” in trade talks should be seen as a signal for rising volatility. This suggests that the market calm following the initial framework agreement before August 1 may be short-lived. We believe this is an opportunity to look at strategies that profit from increased price swings in the weeks ahead.
We should consider buying protection on European equities, particularly in tariff-sensitive sectors like German automakers. The Euro Stoxx 50 Volatility Index (VSTOXX), a key measure of market fear, is currently trading near 18, a low not seen since the spring. Looking back at the trade disputes of 2024, we saw this index spike above 25 on similar news, making volatility options look cheap right now.
The ongoing uncertainty is also likely to weigh on the euro while boosting the US dollar as a safe haven. The EUR/USD exchange rate, which has been stable around the 1.08 mark for the past month, could face significant pressure. We anticipate a potential test of the year-to-date lows near 1.06 if negotiations sour or headlines turn negative.
Trade Talks and Market Implications
The talks to create a zero-tariff “exemption list” will create clear winners and losers among European industrial and agricultural firms. This sets up ideal conditions for using options like straddles or strangles on companies whose tariff status is unknown. Such positions would profit from a large price move in either direction once a company’s fate is revealed in the ongoing talks.
