(Bloomberg) -- Bold bets on the European Central Bank’s next moves on interest rates are making waves in the options market.
One trader paid €625,000 ($661,000) for options that will pay out tenfold in two scenarios, according to people familiar with the transaction. The first is if the ECB reduces rates by a hefty 75 basis points in December. The second is if the central bank cuts by half a point and indicates another move lower in January.
That follows other wagers betting Europe will have to loosen policy faster if the economy comes under pressure from incoming US President Donald Trump. ECB policymaker Joachim Nagel has warned that Trump’s tariff plans could cost Germany 1% of economic output and even lead to negative growth.
Money markets are already factoring in the chances of a steeper cut from the ECB. The probability of a half-point reduction in December has more than doubled since the election result last week to 25%. That’s because the comprehensive victory, including the Republican party taking control of both chambers of the US Congress, makes it more likely that Trump can enact his tariff proposals.
“The risk of a more stagflationary environment has increased,” said Carsten Brzeski, global head of macro research at ING. “If the ECB’s gut feeling doesn’t change, given this stagflationary scenario and the additional downward pressure on growth from US policies, the question for the December meeting is no longer if the ECB will cut rates again, but whether the cut will be by 25 basis points or 50 basis points.”
The trend for wagers on faster and deeper rate cuts in Europe had already preceded Trump’s victory, fueled by stagnating private-sector activity in October. Germany, the region’s largest economy, is also contending with worsening investor confidence and the collapse of its government.
Pressure to act may also come from the ECB reduction of its balance sheet, which is putting upward pressure on borrowing costs, according to a blog post from the central bank. This may provide ammunition for policymakers who insist that further reductions in bond holdings may necessitate a trade-off in the form of even more rate cuts.
(Updates with other bets, quote.)
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