It was a day the markets will not forget quickly. The FTSE 100 shed 2.3% in afternoon trading, while the S&P 500 fell 3.
1%, as a perfect storm of tech rout and geopolitical tension swept through global equities. The tech-heavy Nasdaq Composite led the decline, dropping 4.2% as investors fled from high-growth names that had been propped up by cheap money.
The trigger for the sell-off was a profit warning from a major US chipmaker, but the real fear is that this is the beginning of a broader correction. On top of that, renewed hostilities in the Middle East have sent crude oil prices surging above $90 a barrel, stoking inflation fears that have been simmering for months. The 10-year gilt yield rose 12 basis points to 4.
45%, reflecting a flight to safety that paradoxically drove bond prices lower as investors demanded higher yields to compensate for risk. The Bank of England is now in a bind: it must fight inflation, but raising rates further would crush an already fragile economy. The Chancellor will be watching gilt yields closely; a sustained rise could unravel the fiscal picture.
Capital flight out of emerging markets has accelerated, with the Turkish lira hitting another record low. For now, the market is pricing in a 70% chance of a 25 basis point rate hike at the next MPC meeting. But the real question is whether central banks can contain the damage without triggering a recession.
The answer, from where I sit, is not very likely.
