The EU is aiming to reach a negotiated deal with the US by 1 August. Concurrently, the EU is considering a broader range of potential countermeasures against US tariffs.
Currently, the proposed retaliation targets roughly €72 billion worth of US goods. Discussions are ongoing, with only 11 days remaining until the deadline.
Meeting In Berlin
Later this week, German Chancellor Merz and French President Macron are set to meet in Berlin. They plan to continue discussions on tariffs, having already talked over the weekend.
We believe the increasing talk of countermeasures points towards higher market volatility. With the EURO STOXX 50 Volatility Index (V2X) recently trading below 15, options that profit from a spike in uncertainty appear attractively priced. This setup presents a classic opportunity to buy protection or speculate on market swings ahead of the deadline.
Looking back at the 2018-2019 US-China trade tensions, we saw the VIX index repeatedly surge over 40% in a matter of days following tariff escalations. A failure to secure a negotiated solution by the August 1st deadline could trigger a similar reaction in European markets. We anticipate that a breakdown in talks will disproportionately impact export-heavy indices like Germany’s DAX.
Opportunities In Currency Derivatives
Given the potential scale of the retaliation, we are focusing on protective put options for European automobile and luxury goods sectors. These industries are consistently targeted in trade disputes and saw their stocks fall between 5-10% during previous tariff threats. The upcoming meeting between Merz and Macron will be a key indicator of how unified and aggressive the response might be.
The lack of a clear deal also creates opportunities in currency derivatives, specifically on the EUR/USD pair. An escalation would likely weigh on the Euro, as a trade dispute could damage the EU’s growth outlook more than the US’s. We see value in buying EUR/USD put options with expiries after the August deadline to hedge against a negative outcome.
