Germany’s VDMA has expressed concerns over the US-EU trade deal, suggesting it could impose annual costs on German carmakers. The association points to recent developments where Trump’s tariffs have already negatively impacted companies like Volkswagen.
Volkswagen experienced poor Q2 earnings, partially due to these tariffs. Even though the new tariffs may not be as severe, they are expected to affect the future of Germany’s automotive industry.
Bearish Outlook on the German Automotive Sector
The warning from the industrial association reinforces our bearish outlook on the German automotive sector. We believe traders should consider buying put options on key players like Volkswagen, BMW, and Mercedes-Benz. This allows for a defined-risk approach to profiting from the expected downside as trade headwinds continue.
This pessimism is not isolated; it’s a systemic risk that could weigh on the broader German market. The latest Ifo Institute survey confirms this, with its business climate index for the automotive sector plunging to -15.2, signaling deep-seated gloom over future prospects. We are therefore also looking at shorting DAX futures as a hedge against a market correction led by its most significant industry.
Opportunity in Rising Volatility
Beyond directional bets, the situation screams for a play on rising volatility. Germany’s volatility index, the VDAX-NEW, has been lingering near a relatively low 16, which we feel underprices the risk of sudden policy shifts from the US. We see this as a chance to buy long-dated straddles on automakers, a strategy that profits from a large price move in either direction.
We’ve seen this scenario play out before during the 2018-2019 trade disputes, which sent German auto stocks into a tailspin on tariff threats alone. The US remains a critical market, importing German cars worth over €30 billion annually according to the latest Destatis figures. This historical precedent and current data suggest that defensive positions are the most logical response in the coming weeks.
