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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The writer is chief economic strategist at Netwealth

Are financial markets pricing sufficiently for future risks? Measures of financial market volatility suggest not. 

There are different measures of market volatility. Occasionally, they move the same way. This is often countercyclical, when the economic environment is stable and the political and policy outlook is clear and predictable.

Shocks, likewise, can have a similar effect, usually triggering rising volatility. Then the policy response may lead asset classes to behave differently, both in direction and volatility.

What about now? Volatility across equity and currency markets is low. The most widely followed gauge of equity market volatility expectations is the Vix. Its value of 12.46 compares with an average over five years of 21.5 and over the longer-term of 19.9.

Increased issuance of yield-enhancing structured investment products and their greater use by option dealers has reinforced the low value of the Vix. Notwithstanding this, other measures such as standard deviations in market moves confirm low volatility. The fall in inflation since 2022 has been the main driver. Equity markets, it seems, are discounting good news and a disinflationary environment.

More remarkable, perhaps, is low volatility across currency markets. The DB index of foreign exchange volatility captures the picture. It is at 6.3 versus an average of 7.6 over five years and 9.3 over the longer term. This is despite bouts of volatility associated with a competitive weakening of the yen, renminbi and won. 

However, low currency volatility may discourage hedging, undermine market depth and resilience. Low volatility and tight spreads in credit interest rates over benchmarks have also been evident in corporate bond markets, despite higher refinancing costs and defaults. 

In contrast, volatility in bond markets has risen this year. The ICE BofA Move index of volatility in US Treasuries is at 83.6, just below both its five-year and longer-term averages. This is explained by the market’s shift away from expectations of a large number of rate cuts in the US. 

As policy rates fall, bond market volatility should ease, perhaps temporarily. But the challenge is that many of the assumptions underpinning low volatility across markets may be subject to challenge. Not least is how the juncture of political, geopolitical, policy and economic risks are likely to align.

Take inflation. Inappropriate monetary policy and supply-side shocks led inflation to persist. A key driver of low global

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The Bank of England’s vast sale of government bonds is causing a shortage of cash in corners of the money markets and may need to end, investors have warned.

Over the past two years, the BoE has shrunk its balance sheet from nearly £1tn to about £760bn largely by reducing its holdings of government debt it bought under numerous rounds of quantitative easing stimulus.

Unlike other central banks, the BoE is not just waiting for bonds to mature but actively selling them.

Under QE, the BoE created money to buy government bonds. As it reverses course, it allows bonds to mature without replacing them while selling others back to investors and the money it receives is destroyed, in a process known as quantitative tightening that is draining the liquidity that has flooded markets in recent years.

As a result, surges have occurred in short-term lending markets and investors are rushing in to tap a special BoE facility that allows them to borrow cash in exchange for collateral of government bonds.

Investors last week borrowed £16bn from this BoE short-term repo facility, which was set up in 2022 to help borrowers — predominantly banks — access short-term cash. This was a sharp increase from less than £5bn early last month.

The scarcity of cash, which also led to a recent jump in repo rates, could cause the BoE to slow down the process of shrinking its balance sheet when it reviews its policy in September, according to analysts at Barclays, Bank of America and NatWest.

“When you peer beneath the bonnet, there are lots of little things which point to something a bit more profound . . . all of which are pointing to frictions starting to show up in the market,” said Barclays strategist Moyeen Islam. “It was not supposed to happen” so soon in the process of winding down the BoE’s gilt portfolio, he added.

BoE governor Andrew Bailey said last week that the take-up of the repo facility was “encouraging” and that he expects a “significant increase” in its usage. His estimate for the “steady state” of the balance sheet is between £345bn and £490bn.

However, analysts think the actual steady size of the central bank balance sheet that allows smooth functioning of money markets could be considerably larger. A rise in money market lending rates could potentially blunt the

The International Monetary Fund raised its forecast Wednesday for China’s growth this year to 5%, from 4.6% previously, due to “strong” first quarter figures and recent policy measures. China’s economy grew by a better-than-expected 5.3% in the first quarter, supported by strong exports. Recent real estate policy moves are “welcome,” but more comprehensive action is needed, Gita Gopinath, the IMF’s first deputy managing director, said in a statement. A worker rides a bicycle past a housing complex under construction in Beijing on May 17, 2024.  Jade Gao | Afp | Getty Images

BEIJING — The International Monetary Fund on Wednesday raised its forecast for China’s growth this year to 5%, from 4.6% previously, due to “strong” first quarter figures and recent policy measures.

The upgrade followed an IMF visit to China for a regular assessment. The organization now expects China’s economy to grow by 4.5% in 2025, up from the previous forecast of 4.1%.

But by 2029, they anticipate China’s growth will decelerate to 3.3% due to an aging population and slower productivity growth. That’s down from the IMF’s prior forecast of 3.5% growth in the medium term.

China’s economy grew by a better-than-expected 5.3% in the first quarter, supported by strong exports. Data for April showed consumer spending remained sluggish, while industrial activity picked up.

About two weeks ago, Chinese authorities announced sweeping measures to support the struggling real estate sector, including removing the floor on mortgage rates.

The policy moves are “welcome,” but more comprehensive action is needed, Gita Gopinath, the IMF’s first deputy managing director, said in a statement.

“The priority should be to mobilize central government resources to protect buyers of pre-sold unfinished homes and accelerate the completion of unfinished presold housing, paving the way for resolving insolvent developers,” she said.

“Allowing for greater price flexibility, while monitoring and mitigating potential macro-financial spillovers, can further stimulate housing demand and help restore equilibrium.”

The IMF release said that during her visit to China this month, Gopinath met with People’s Bank of China Governor Pan Gongsheng, Ministry of Finance Vice Minister Liao Min, Ministry of Commerce Vice Minister Wang Shouwen, PBOC Deputy Governor Xuan Changneng, National Financial Regulatory Administration Vice Chairman Xiao Yuanqi.

“Near-term macroeconomic policies should be geared to support domestic

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