China’s commerce ministry has criticised the EU’s proposed Industrial Accelerator Act and filed comments on 24 April. It said the plan includes discriminatory provisions against foreign investors.
China said the measures breach World Trade Organization principles, including most favoured nation and national treatment rules. It said they could undermine fair competition and investor confidence.
Trade Tensions And Policy Risk
Germany’s consumer climate for May weakened, with the GfK headline indicator falling to -33.3 from -28.1 in April. This was a 5.2-point drop and the lowest reading since February 2023.
Economic expectations fell to -13.7. The data cited higher energy prices and geopolitical tensions linked to Iran as factors affecting the Euro area outlook and EUR/USD.
The combination of trade friction with China and a sharp drop in German consumer confidence suggests a bearish outlook for European assets. We should consider buying put options on the EUR/USD, as the currency is likely to weaken further from its current levels around 1.05. Looking back, similar weak sentiment readings in 2025 preceded a period of economic sluggishness, which the European Central Bank may now have to counter with a more dovish policy stance.
This weakness in Germany, the Eurozone’s economic engine, points to trouble for European equities. The DAX index is particularly vulnerable given its heavy weighting of exporters who rely on Chinese markets, which accounted for a significant portion of their sales last year. We believe purchasing puts on the DAX or a broader European index like the STOXX 600 is a prudent strategy to hedge against a potential downturn in corporate earnings.
Volatility And Rates Positioning
Geopolitical tensions involving Iran and trade disputes create uncertainty, which is a key driver of market volatility. This environment makes buying call options on the VSTOXX, Europe’s main volatility index, an attractive proposition. When we saw a similar increase in Middle East tensions in late 2024, the VSTOXX index surged over 30% in a matter of weeks, indicating how quickly sentiment can shift.
The poor economic data will likely force the European Central Bank to reconsider any hawkish policy leanings. The market is now pricing in a higher probability of an interest rate cut before the end of the year, a noticeable shift from just a month ago. Therefore, we see an opportunity in interest rate derivatives, such as buying German Bund futures, to capitalize on falling yields.
