ECB Vice President Luis de Guindos said on Tuesday that the ECB views private credit as a risk to financial stability. He also listed high market valuations and loose fiscal policy in some countries as sources of risk, according to Reuters.
The comments did not move the euro, as they gave no clear guidance on the monetary policy outlook. At the time of reporting, EUR/USD was 0.2% lower, trading near 1.1760, with the US dollar firm.
We are seeing a disconnect where European officials flag risks in private credit and high market valuations, yet the market’s immediate response is quiet. This suggests complacency, which often precedes a rise in volatility. For us, this is a signal to look for undervalued protection against potential market shocks.
The VSTOXX volatility index is currently trading near 13.8, a multi-year low, making options relatively cheap. Meanwhile, the EURO STOXX 50 index is trading at a forward price-to-earnings ratio of over 15, which is well above its ten-year average and signals stretched valuations. This combination of low implied volatility and high valuations presents a compelling case for buying downside protection.
We remember similar central bank warnings back in 2021 regarding inflation risks, which the market largely dismissed before the aggressive rate hikes of 2022 forced a major repricing. Looking back from our perspective in 2025, that period serves as a clear lesson on heeding such official notices. These historical patterns show that official warnings can be leading indicators of risks the market is currently choosing to ignore.
Therefore, in the coming weeks, we should consider gradually building positions in long-dated put options on major European indices. Using put spreads can help manage the cost of this insurance while the market remains calm. We should also monitor European corporate credit spreads, like the iTraxx Europe Crossover index, as any significant widening there would be the first sign that these flagged risks are materializing.
