Insights 
VT 
The European Union is reportedly moving to eliminate all tariffs on US industrial goods, aiming to quickly pass legislation to meet the demands of former President Trump. This legislative process is anticipated to be finalised by the end of the week. The EU’s actions are aimed at prompting the US to reconsider the 27.5% tariffs currently imposed on EU automobiles.
Additionally, the EU is considering offering preferential tariff rates on specific seafood and agricultural products. This move serves as an incentive to foster better trade relations, primarily seeking a reduction in existing auto tariffs. According to reports, if the EU finalises the legislative proposal by the end of the month, the 15% tariff rate on autos could be retroactively applied to 1 August.
Market Sentiment Shift
Given the report that the European Union may be fast-tracking the removal of tariffs on US industrial goods, we are positioning for a significant shift in market sentiment. This potential de-escalation in trade tensions comes after a tense first half of 2025, where German auto exports to the US fell by over 8% year-over-year according to the latest VDA figures. The key is the potential backdating of the reduced 15% auto tariff to August 1st, which would provide an immediate boost to third-quarter earnings for major automakers.
For traders, this suggests a bullish outlook on the European automotive sector and the broader German DAX index, which has underperformed the S&P 500 by nearly 4% year-to-date. We should be looking at buying near-term call options on names like Volkswagen and Mercedes-Benz, as their stock prices are most sensitive to US tariff news. A move on DAX index futures would also be a direct way to play a broad European recovery on the back of this news.
The currency market will likely see the Euro strengthen against the US dollar if this deal proceeds, reversing some of the weakness we observed earlier in the summer. Implied volatility on EUR/USD options has already ticked up to 8.2%, above its three-month average, presenting an opportunity. Selling EUR/USD put options would be one way to express a bullish view on the Euro while taking advantage of the elevated premium.
Volatility and Risk Management
We should also anticipate a sharp drop in volatility if a deal is officially announced by the end of the week. The VDAX-NEW, the volatility index for the DAX, is currently elevated, reflecting the present uncertainty around this trade issue. Selling straddles on the index could be profitable, as it bets on volatility collapsing and the market finding a new, higher trading range after the good news is priced in.
However, we must also consider the risk that this proposal fails, much like the temporary breakdown in talks we saw in late 2024. Any sign of political pushback within the EU could scuttle the deal and cause a sharp reversal. Therefore, holding some cheap, out-of-the-money DAX put options as a hedge for the coming weeks would be a prudent measure against a negative surprise.
