Low market volatility is raising long-term risks

The low levels of volatility in financial markets reflect a high degree of confidence in the ability of the authorities to prevent crises and respond to shocks, expectations that any policy changes will be gradual, and a reduction in economic instability. Unfortunately, none of these factors can be taken for granted. What’s more, extended periods of low volatility can themselves increase the chances of a crash.

Admittedly, there are no obvious triggers on the horizon for a major correction. We will have a go at identifying some in follow-up pieces. However, the omnipotence of policy-makers may be tested and found wanting by some new economic or financial shock, as yet unknown.