(Bloomberg) — One trader is betting that European policymakers will slash borrowing costs below 1% next year in a dramatic U-turn.
(Bloomberg) — One trader is betting that European policymakers will slash borrowing costs below 1% next year in a dramatic U-turn.
That’s a radical view given money markets see a European Central Bank rate of about 3.5% by mid-2024. If the wager comes off it would return €175 million, or more than 12 times the €14 million premium paid. The identity of the trader, or whether the move was an outright punt or a hedge, could not be verified.
It shows investors are now accounting for a quicker end to the sharpest policy tightening in history, in the wake of US bank collapses. Money markets are currently expecting the ECB to take its rate from 2.5% now up to 3.6% by October — that’s less than a peak of 4.1% seen just last week.
The trader made the wager late Tuesday using options tied to three-month Euribor futures, the benchmark euro funding rate. That rate slid the most since 2001 the same day, as the market reduced bets on the ECB sticking to aggressive hikes.
The outlook for further policy tightening has seesawed following the collapse of Silicon Valley Bank on Friday, and then a brief stabilization in bank stocks this week after US authorities stepped in with extraordinary measures such as a backstop for depositors.Â
The ECB meets to set policy on Thursday. Economists expect it to stick to a widely-mooted 50 basis-point hike despite the US banking turbulence. The rate was last below 1% in October, following years at sub-zero levels following the euro-area’s debt crisis.
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