Are mainstream investors ready for disaster? With the clock ticking close to a US government debt default described by Treasury secretary Janet Yellen as an “unthinkable” move with “dreadful consequences”, we could be about to find out.

For specialist hedge fund managers who make money only in the event of calamities such as financial crises and pandemics, bracing for the worst is pretty easy: just keep picking up options and other instruments on the cheap that provide a hedge against sudden price falls. Then when the nightmare scenario strikes, count your billions and slap on your best suit to go on Bloomberg TV and say you take no pleasure in everyone else’s pain.

More typical fund managers who cannot afford to make money just once a decade have a trickier task.

On the face of it, they are ready for the small chance that the market underpinning every asset value on earth is about to backfire. Prices for US credit default swaps — derivatives that provide a kind of insurance against non-payment of debt — have picked up markedly albeit with only tiny volumes changing hands compared with the vast size of the market. That means some investors, most likely hedge funds and especially those that thrive on disaster, have placed low-cost, high-reward bets on a market meltdown. But even this market is not looking panicky, as such.

Meanwhile, a glance at the US stock market would not suggest anything is amiss. The benchmark US equities index the S&P 500 has been going nowhere since the end of March. You can make the case it should be higher, given the continuing slowdown in inflation, so maybe the debt ceiling cliff edge is holding it back. Maybe.

Still, this is not a market that looks like it could be just three weeks or so away from a government debt default. It is a serious possibility, though; Unless Congress raises or somehow redefines the US debt limit sharpish, the federal government will find itself unable to make a range of payments including to holders of its debt, potentially as soon as early June.

It is hard to overstate how much of a problem this would be for markets. If Treasuries fail, then stocks, bonds and everything in between will convulse in violent ways that are hard to predict. The desperate dash for cash in March 2020 and the UK gilts crisis of 2022 are just two reminders of how sudden market shocks can turn ugly, quickly.

The relative calm now stems from several sources. One is that analysts and investors broadly believe cool heads will prevail. Congress will do a deal or find some kind of fudge or gimmick to avert a horror show, just as it did the last time this issue really flared up in 2011 and just as it has done 78 times since 1960. Fund managers feel like they have seen this movie before and it always ends OK.

This time it is dangerous to assume politicians will find a compromise. As political analyst Tina Fordham points out, a tendency towards calm, sensible problem-solving is not exactly a prized asset for Congressional members these days. She thinks there is a roughly 20 per cent chance of a US debt default in the coming weeks. “Twenty per cent probability events happen all the time,” she said on CNBC this week.

The other reason this is not yet really hurting stocks is that, just as it is not possible to be a little bit pregnant, “it is hard to price in a little bit of default”, say rates analysts Richard McGuire and Lyn Graham-Taylor at Rabobank. “Hence, CDS and short-dated Treasury bills are reflective of heightened hedging demand while equities . . . appear somewhat insulated as the game of brinkmanship is played out.”

Rabobank’s analysts are with the crowd on this: “Our base case is that a default will be avoided.” Even so, they point to the other big danger, which is that for the politicians involved, the chaos itself is an important part of the process.

“It is in the interests of both parties to appear willing to countenance [a default] for as long as possible, as this maximises the likelihood of extracting concessions should the other side blink first,” they said. “[That] does raise a clear risk that the market’s apparent broader sanguinity on this front will be tested in the coming weeks.”

This is a view shared by Sushil Wadhwani, chief investment officer at PGIM Wadhwani. In a note this week, he said that “in an increasingly polarised environment, politicians will need to see significant market turbulence in order to reach an agreement”.

Investors are conditioned to believe that in the event of some kind of downturn in markets, stocks will quickly push back up. As Wadhwani pointed out, that is unhelpful. “There is a concern that the market is being complacent and that investors could be in for a sudden shock,” he said. “Investors would not want to see unexpected fiscal tightening at a time when the risks of US recession are already rising and the possibility of a hard landing is increasing.”

If you are trundling along assuming this will all work out just fine, you’re possibly in the same camp as Donald Trump, who thinks “it could be really bad, it could be maybe nothing, maybe it’s a bad week, or a bad day, who knows?” That may help focus the mind.

katie.martin@ft.com

Wall Street stocks fell on Friday as fresh data revealed US consumer sentiment falling to its lowest level this year, raising fears the domestic economy was rapidly slowing down.

Wall Street’s benchmark S&P 500 reversed earlier gains to trade 0.7 per cent lower while the Nasdaq Composite was down 0.9 per cent.

The moves follow the preliminary reading of the University of Michigan’s consumer sentiment index, which fell to 57.7, missing economists’ expectations for it to stay close to April’s reading of 63.5. Participants’ worries escalated alongside negative news about the economy, including the debt-ceiling crisis.

Moreover, the US regional banking sector spooked investors again, as lender PacWest Bancorp lost 1.3 per cent. A day earlier, the bank shed 23 per cent after the bank announced it lost almost a tenth of its deposits in the first week of May. The KBW Regional Banking Index was down 0.5 per cent, indicating lingering fears over the profitability of the market.

Investor sentiment is being swayed by economic data, with traders looking for signs the Federal Reserve had made progress in cooling the US economy and reducing inflation, and might be nearing the end of its policy of higher interest rates.

Earlier this week data on jobless claims signalled that the Fed’s series of aggressive rate rising was having an effect. The tech-heavy Nasdaq Composite index has added nearly 20 per cent in the year to date, far outpacing the 8 per cent gain of S&P 500.

“The anticipation of that peak [of interest rate rises] from the Federal Reserve is supporting tech more than it is supporting anything else,” said Mobeen Tahir, director of macroeconomic research and tactical solutions at WisdomTree Europe.

“We clearly see a rotation back into growth leading the way this year, and that’s evident from the outperformance of the Nasdaq versus the S&P 500,” he added.

The yield on interest rate-sensitive two-year Treasury notes rose 0.08 percentage points to 3.99 per cent, while the yield on 10-year notes was up 0.051 percentage points, at 3.45 per cent. Bond yields rise when prices fall.

In Europe, the region-wide Stoxx 600 share benchmark rose 0.4 per cent, aided by strong corporate earnings from Switzerland’s Richemont, which boosted luxury goods makers. France’s CAC 40 added 0.5 per cent, led by strong earnings from French reinsurer Scor.

The rises come despite hawkish signalling from the European policymakers, with the head of Germany’s central bank Joachim Nagel saying eurozone interest rates could still rise in September because of sticky underlying inflation measures.

The ECB last week raised its deposit rate to 3.25 per cent. Most economists expect it to pause at 3.75 per cent in July.

London’s FTSE 100 gained 0.3 per cent on Friday as official data showed the economy expanding 0.1 per cent between the last quarter of 2022 and the first three months of this year, unchanged from the previous quarter and in line with analysts’ expectations.

The dollar gained 0.6 per cent against a basket of six other currencies on Friday.

Equities declined in Asia, with Hong Kong’s Hang Seng index falling 0.6 per cent and China’s CSI 300 shedding 1.3 per cent. Japan’s Topix was the exception, adding 0.6 per cent and buoyed by positive earnings forecasts from some of the country’s biggest companies in recent days.

Hello and welcome to the latest edition of the Cryptofinance newsletter. This week we’re reviewing the FT’s Crypto and Digital Assets Summit.

What a difference a year makes. This week the FT hosted its second annual crypto summit, a chance to take stock and to anticipate the latest trends. What stood out was just how much attitudes and expectations had evolved in 12 months.

Last April, at the FT’s inaugural summit, the industry’s evangelists and enthusiasts came ready to preach the promise of crypto, buoyed by Super Bowl ads and pricey NFTs. It turned out to be very height of the market.

Weeks later Do Kwon’s Terraform Labs collapsed and the bubble was lanced. After a humbling diet of Kwontitative easing, the failed supercycles theory of bitcoin adoption and one epic Caribbean crypto collapse, attendees this year were more realistic with their ambitions.

“What happened in 2022, whether it be Terra/Luna, Three Arrows Capital, or really most notably FTX, is that it really did scare the institutional investors away,” said Kristin Smith of the Washington DC-based Blockchain Association. She hoped institutional interest would return.

“There’s no way that I can sit here and say the adoption [of crypto] has been as quick as I would have expected,” said David Mercer, chief executive of trading platform LMAX Group, during the summit’s opening keynote interview. 

One notable aspect of the past year has been the speed of the decline of FTX and Terraform Labs, because digital finance allows investors to remove money quickly and remotely and social media distributes news and rumour instantaneously.

Eun Young Choi, director of the national cryptocurrency enforcement team at the US Department of Justice, told my colleague Stefania Palma that FTX’s collapse was “a wake-up call for the public writ large, to see how quickly a company can fall”. 

“The scope of crypto crime, or as we see, crypto-related crime, has sort of increased pretty tremendously over the course of the last few years. In addition, the volume of the transactions we’re seeing that are related to criminal activity is up,” she added.

The collapse reinforced Binance’s position as the world’s largest crypto exchange. It has set up a separate arm for US customers but there are still doubts as to how concrete the differences are between them. Earlier this year the crypto behemoth came under CFTC crosshairs when the US derivatives regulator said the exchange illegally accessed American customers. Binance has called the lawsuit “unexpected and disappointing”.

Noah Perlman, Binance’s new chief compliance officer, shared the stage with me on Tuesday and I asked him to clarify how US regulators can trust whether the two entities are indeed separate, especially given the fact Binance chief Changpeng Zhao is the ultimate beneficial owner of Binance US. His response in full:

“The industry still has some rehabilitation to do in terms of the trust with the regulators in the US, I think a lot of them feel burned by Sam [Bankman-Fried] and by other things, so I’m not sure how much they take us . . . I mean, it is the truth, they are separated, but we’ve got work to do there still.” 

Yet regardless of the many pain points, it wouldn’t be a crypto conference without a lofty prediction about what lies ahead for an industry built on, well, lofty predictions.

For Bart Stephens, co-founder and managing partner of Blockchain Capital, a venture capital firm, it will be the advance of artificial intelligence that changes the perception of crypto.

It is the natural currency for an AI-dominated world, he argued, rather than sovereign currencies and the traditional banking system.

“When you look at how AI and crypto are going to intersect, it’s hard for me to think that an AI assistant is going to swipe a Visa credit card. They’re going to be naturally drawn to always on, natively digital, decentralised, distributed and transparent networks . . . Swift isn’t gonna cut it, Visa isn’t gonna cut it.”

Did you attend our crypto summit? Where will crypto be by the time our third annual event rolls around? Email me your thoughts at scott.chipolina@ft.com. 

Weekly highlights

• The first of two other takeaways from the FT’s crypto summit: Binance’s chief strategy officer Patrick Hillmann told me it is now a “very difficult” time to do business in the US, adding the exchange will do everything it can to become regulated in the UK. He declined to confirm whether Binance has reapplied for registration with the FCA. Story with my colleague Nikou Asgari here. 

• Second, SEC commissioner Hester Peirce told the summit’s audience the US risks falling behind the EU and the UK without rules for governing crypto assets. The comments made by the regulator’s most senior Republican member put her at odds with SEC chair Gary Gensler, who has been leading America’s charge against crypto with a blitz of enforcement actions.

• Coinbase ruffled crypto feathers this week when it published a blog associating PEPE — the latest craze in meme coin land — with the alt-right. The token, which is based on the Pepe the Frog meme, has been “co-opted as a hate symbol by alt-right groups, according to the Anti-Defamation League”, the exchange said. After the blog post’s publication #DELETECOINBASE started trending on Twitter.

Soundbite of the week: DeFi’s problem with reality

This week’s soundbite honour goes to Miller Whitehouse-Levine, chief executive at the DeFi Education Fund, an organisation whose mission it is to “educate policymakers about the benefits of decentralised finance”. 

On an FT panel discussing the possibility of regulating crypto on a global scale, the DeFi chief was candid about one of the crypto industry’s central tenets, namely that the rules of the crypto game are set by the blockchain and not regulators or the government. 

“The idea of ‘code is law’ has run into the problem of reality . . . at the end of the day we all exist in the real world and we adjudicate disagreements through a judicial system in the United States that has developed over centuries.”

Data mining: Binance’s grip on spot crypto market slips 

The world’s largest crypto exchange, Binance, continues to lose its grip on the spot crypto trading market.

Last month its market share dipped to 46 per cent, according to numbers from data provider CCData. That’s not only the second month of declines but its lowest market share since October 2022, just weeks before the collapse of former rival FTX caused significant levels of trading to move on to Binance.

For what it’s worth, the industry behemoth still dwarfs its competitors. Binance’s market share has been spread out between its rivals. Coinbase and OKX — the next two largest exchanges — each accounted for only 5 per cent of the market.

Cryptofinance is edited by Philip Stafford. Please send any thoughts and feedback to cryptofinance@ft.com.

The writer was governor of the Bank of England from 2003 to 2013

Fifteen years ago, the collapse of the western banking system led to the adoption of thousands of pages of complex regulations. Yet here we are in the middle of another crisis of confidence in banks. Silicon Valley Bank and Credit Suisse had idiosyncratic problems. In the latter case, weak regulation and procrastination by the Swiss authorities exacerbated the problem. In the former, contagion affected other small banks.

Banks are inherently fragile — they transform short-term and safe funding into long-term and risky lending. This is the alchemy of the banking system. The speed at which those short-term liabilities can run means that banks can be here one day and gone the next. Most of the time, however, banking provides a cheaper supply of capital to finance real investment.

Several centuries’ experience testifies to the attractions of banking as a way of financing investment, as well as to its fragilities. Can we retain these benefits while reducing or even eliminating the costs? Yes — provided that we put in place a framework governing the provision of central bank liquidity, the only reliable source of liquidity in a crisis.

For too long, central banks and regulators have been content to wait until there is a crisis and then deploy ad hoc measures, making it up as they go along. Once a panic has started, liquidity is necessary to put out the fire and prevent widespread contagion. But the provision of free insurance after the fact is also an incentive to take excessive risks, which leads to ever larger fires.

In 2023, attention has focused on runs by depositors, leading to suggestions in both the US and UK that the upper limit on insured deposits be raised. But in the financial crisis the problem was the reluctance of wholesale suppliers of short-term finance to roll over their funding. The lesson is that any so-called “runnable liability” — such as deposits that can be quickly withdrawn or anything that is redeemable on demand — can result in the central bank having to provide liquidity.

The traditional lender-of-last-resort role played by central banks became outdated when commercial bank assets began to comprise “bad” collateral, which could not be valued in the short timescale required to counter a run. What can replace it?

Governments and central banks must answer two questions.

First, which institutions should have access to liquidity from central banks? Commercial banks certainly qualify — their deposit liabilities form the bulk of the stock of broad money. Any doubt about its safety would leave the economy exposed to violent movements in the means of payment, resulting in sharp contractions in output and inflation. But society may worry also about the safety of insurance companies, pension funds and other financial intermediaries. Such bodies must either be prohibited from maturity transformation (borrowing short-term and lending long-term) or given access to central bank liquidity on the terms below.

Second, how can we limit the scale of central bank provision of liquidity in a crisis to avoid taxpayer-financed bailouts? By preventing banks from issuing more runnable liabilities than the central bank is willing to lend against available collateral.

The basic principle is that banks should always have a contingent credit line from the central bank to cover runnable liabilities. Each bank would decide how much of its assets it would preposition at the central bank. For each type of asset, the central bank would calculate the “haircut” it would apply when deciding how much cash to lend against it. It would then be clear how much central bank money the bank would be entitled to borrow. A bank’s effective liquid assets must exceed its runnable liabilities.

In effect, the central bank would be a pawnbroker for all seasons (PFAS). Haircuts would remain fixed for a lengthy period, and on risky assets would, therefore, be conservative. Setting haircuts is not a task well suited to emergency conditions. Banks would be free to decide on the composition of their assets and liabilities, all subject to the PFAS rule. Crucially, no run could bring down a bank because there would always be cash available to cover all the runnable liabilities.

The PFAS rule is not a pipe dream. Paul Tucker and I encouraged banks to preposition collateral after the financial crisis, and the Bank of England has been in the vanguard of such policies ever since. Moreover, the expansion of quantitative easing has led automatically to a substantial increase in the deposits of commercial banks at the central bank. Such has been the scale of QE that if PFAS were introduced today it would require little change to the funding of most large banks and hence to their provision of credit.

This one simple rule could replace most existing prudential capital and liquidity regulation, as well as deposit insurance. It makes little sense for central banks, as the US has done, to guarantee all deposits in a bank that fails and yet maintain that the upper limit on deposit insurance remains for all the other banks.

The regulatory reforms that followed the financial crisis were little more than a sticking plaster. The system now requires a simpler, less costly but comprehensive approach to the provision of central bank liquidity.

The UK economy expanded in the first quarter as activity showed greater resilience than forecast earlier in the year, even as output contracted more than expected in March.

Gross domestic output, or GDP, rose by 0.1 per cent between the last quarter of 2022 and the first three months of this year, unchanged from the previous quarter, according to data published by the Office for National Statistics on Friday.

On Thursday, the Bank of England said it expected the economy to stagnate in both the first and second quarters with growth accelerating in the rest of the year.

ONS data showed that the quarterly rate was boosted by growth in January, revised up to 0.5 per cent, while output fell by 0.3 per cent between February and March, as falling services output weighed on growth.

South Africa’s gold rush began in the late 19th century. Another one has begun, this time in New York City. Enterprises outside America now seek out the deep veins of capital via the New York Stock Exchange. AngloGold Ashanti on Friday announced plans to move its primary listing to New York from Johannesburg. As with some British companies leaving their home market, it sees the potential for higher valuation over time.

A London listing was a possibility. As its name implies, AngloGold has long ties to the UK via its holding company subsidiary. Indeed, the holding company will redomicile in the UK. Moving that to the US would incur the threat of a dividend withholding tax. The South African miner has also snubbed London because two-thirds of its share trading already occurs in the US via a depository receipt.

But achieving a higher earnings multiple would not happen right away. A year ago, AngloGold and its local peer Goldfields traded just over five times their forward ebitda, 40 per cent below that of North America’s largest miners Barrick and Newmont. But since then those four multiples have converged around seven times.

A recent bull run in the gold price favours AngloGold and Goldfields. Both have the highest share three-year price sensitivity to the commodity among 17 large gold miners reviewed by Raj Ray at BMO Capital Markets. AngloGold argues that the discount would return once gold prices moderate.

Index inclusion matters too. AngloGold is a large part of the popular US Van Eyck Gold ETF. How much more passive inflows it would receive is not clear. Had it chosen London its near £9bn market value would have meant FTSE 100 inclusion, along with miners Fresnillo and Endeavour Mining. Finally there is the cost, estimated at 5 per cent of market capitalisation — some $560mn today.

That could have bought a new greenfield gold mine project, thinks BMO. Something for shareholders to ponder — three-quarters must approve — when they vote on its restructuring.

When Robyn Grew was working for Lehman Brothers in London in 1999, Japanese regulators raided the bank as part of an investigation into accusations that it and others had helped financial institutions conceal losses.

Grew was quickly dispatched to Tokyo by Lehman’s top brass to help deal with the bank’s response. She spent the next year flying back and forth between the two capital cities, eventually moving there with her wife for a stint.

The episode reflects several traits that close associates say define Grew: a quick thinker and a natural problem solver whose curiosity drives an eagerness to learn on her feet.

This week the gregarious former barrister was named incoming chief executive of Man, the world’s largest listed hedge fund manager with $144.7bn in assets under management.

By the end of this year — and for the first time since it began life in the sugar industry in the late 18th century — Man will be led by two women.

Grew will replace longstanding chief Luke Ellis in September, and former Capital International executive Anne Wade is taking over from investment banker John Cryan as chair.

For 54-year-old Grew, who at present is the president of Man, the promotion marks the culmination of a 14-year career at the FTSE 250 group that she joined in 2009 as its chief compliance officer. Since then she has held a variety of positions including global head of legal and compliance, chief operating officer, general counsel, group COO and head of environmental social and governance.

“I’ve seen her in various avatars . . . she’s quite a force of nature,” said Dev Sanyal, chief executive of Varo Energy and a former non-executive director at Man. “She has a strong compass about who she is and what she does.”

Born in London to an NHS doctor father and a school teacher mother, Grew attended grammar school in Essex and had little idea that the world of financial services even existed.

She studied business law at Coventry University before qualifying as a criminal barrister and then being tempted into the more lucrative world of finance.

Responding to a newspaper advertisement, she joined Fidelity in 1994, followed by a move to the trading floor — the then London International Financial Futures and Options Exchange — during its heyday as an open outcry exchange.

She followed LIFFE with senior positions at Lehman and Barclays Capital. Then a call from the top executives of hedge fund GLG Partners — spun out of Lehman and who she knew from her days there — piqued her curiosity. She joined GLG and the hedge fund industry in 2009, and the following year Man bought GLG for $1.6bn.

Man today is a very different business to the one Grew first knew. The deal was regarded as a reverse takeover by GLG and its aftermath was marked by a testing period of client withdrawals, poor performance at Man’s flagship quantitative strategy unit, AHL, and a culture clash between GLG’s swashbuckling star traders and Man’s PhD quants. The GLG acquisition was later written down by more than $1bn.

Then Manny Roman was appointed Man chief executive in 2013, followed by Ellis in 2016, kicking off a reboot of the company. Behind the scenes, Grew played a central role in the group’s turnround and recovery, working with Roman, Ellis and the then chief financial officer Jonathan Sorrell. She was “the definition of cool, calm and collected” in navigating the egos involved, said one person there at the time.

“There were some quite difficult things we had to do in reorienting the business,” recalled Sorrell, now president of Capstone Investment Advisors. “Robyn was someone you could always count on to do the right thing and move things forward.”

Kate Barker, a former non-executive at Man, said: “She’s really good at pulling out the meat of an issue and distinguishing between big strategic issues and the detail.”

According to those who have worked with her, Grew is an empathetic colleague and a vocal champion of difference — not diversity in the box-ticking sense, but diversity of thought, talent and approach.

While she has on occasion encountered sexism and homophobia in her own career, Grew has met this with customary candour, believing that “turning up and being me and living who I am and talking about my wife and son is incredibly persuasive”, as she has told friends.

Grew inherits a business in good shape that has evolved from a siloed organisation to a large technology-driven investment group. Today 60 per cent of its assets come from its lower-margin solutions business, offering bespoke and tailored partnerships with clients.

But she still faces challenges, beyond the regime change of higher interest rates and higher inflation.

Man has set out its stall on being an active investment group, an approach that faces continuous pressure from cheaper passive investing. It must expand in the US and stay relevant to investors in a world where the hedge fund industry is becoming more and more concentrated. And it must navigate an increasingly complex and politicised environment for ESG investing.

For Grew personally, she must put her own mark on the group after two high-profile chief executives. “Manny and Luke have been at the forefront of the industry,” said Sanyal. “What does Man Group under Robyn look like?”