(Bloomberg) --
Fears of national lockdowns in Europe are trumping any inflation concerns as traders rush to offload bets that the European Central Bank will tighten policy next year.
Traders are now contemplating a scenario of no rate hikes, just a week after betting on a 20-basis-point hike by December 2022. That comes after Austria said it will enter a nationwide lockdown from Monday, and Germany said it may consider a similar move as Europe seeks to get a handle on a resurgence of the pandemic.
The pullback also follows comments from ECB President Christine Lagarde, who said the central bank shouldn't tighten monetary policy too soon -- even in the face of “unwelcome and painful” inflation.
ECB Mustn't Tighten Despite ‘Painful' Inflation, Lagarde Says
“Admittedly it takes some fantasy to see a rate cut next year, but at some point the market needs to take out the view of rising rates next year completely,” said Christoph Rieger, the head of fixed-rate strategy at Commerzbank AG.
Memories of past pandemic-induced lockdowns are fresh in investors' minds as they wager the sharp rise in Covid cases will crimp fledgling growth prospects.
The prospect of easing is not unimaginable for Rieger, who said that if Covid surges in the U.S. this winter “all market bets for next year are off.”
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