The markets are flashing red this morning. A double blow of escalating Middle East hostilities and renewed jitters in the technology sector has sent the FTSE 100 and broader European indices into a tailspin. At the time of writing, the benchmark is down 1.8%, extending its weekly slide to over 3%. The sell-off has been indiscriminate, but the pain is most acute in the growth stocks that have powered the post-Brexit rally.
The trigger? Overnight attacks in the Gulf region, which have raised the spectre of supply disruptions. Oil prices have spiked. More concerning, though, is the flight to safety: gold is up, the yen is strengthening, and yields on 10-year gilts have tumbled 10 basis points to 3.85%. This is not a healthy correction. This is capital heading for the exits.
But the real story is the tech rout. The Nasdaq is down 2.4% in pre-market trading as investors finally wake up to the fact that lofty valuations are not supported by earnings growth. The AI euphoria that inflated balance sheets is fading. Now we are left with the cold calculus of the bottom line. When the cost of capital rises, unprofitable dreams become expensive nightmares.
The question is, will the Bank of England step in? I doubt it. Governor Bailey is no fool. He knows that inflation is still sticky. Cutting rates now would be like pouring petrol on a fire. The market can handle a tantrum. What it cannot handle is fiscal incontinence. And with the government’s spending plans still unravelling, the gilt market remains a hair-trigger.
In short, this is a classic volatility event. The fundamentals are deteriorating. For the prudent investor, it is time to shorten duration and increase cash positions. The relief rally, if it comes, will be a selling opportunity, not a buying one.
