Export Headwinds Intensify
Export conditions remain difficult due to US tariffs and added uncertainty after a Supreme Court ruling. Further pressure comes from weaker demand in China, stronger competition from Chinese firms in third markets and the EU, and reliance on Chinese rare earths. The data follows an economic rebound in the final quarter of 2025. The report also notes expectations that fiscal stimulus will support faster growth later in the year. The January trade data has significantly dampened the optimism we felt after the surprise economic rebound in the final quarter of 2025. This weak start to the year suggests the anticipated recovery is not guaranteed. We should therefore position for increased downside risk in German and European assets over the coming weeks. Considering this, we are looking at buying put options on the DAX index with April and May expiries to hedge against a potential slide. The latest Ifo Business Climate index for February already dipped to 85.2, and with preliminary factory orders for February also showing a 1.5% decline, the case for a bearish stance is growing. This strategy offers a defined-risk way to capitalize on further economic weakness.Positioning For A Risk Off Move
The struggles in Germany, the Eurozone’s economic engine, will likely weigh on the euro. The European Central Bank will find it difficult to justify a hawkish stance, making the currency less appealing. We see an opportunity in shorting EUR/USD futures contracts, as the pair may retest the lows seen last autumn. This kind of uncertainty often sparks a flight to safety, which benefits German government bonds. We saw a similar pattern during the 2011 sovereign debt crisis, when Bund yields compressed as investors abandoned riskier assets. Buying futures on the 10-year Bund provides a solid hedge against a downturn in equity markets. The core issues of US tariffs and the triple shock from China are not resolving quickly and will continue to be a drag. The dependence on Chinese rare earths, combined with rising competition from their manufacturers in our own markets, presents a structural problem. These factors justify maintaining a cautious outlook and a defensive posture through the second quarter. Create your live VT Markets account and start trading now.
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