The FTSE 100 opened in the red this morning, the index shedding 0.8% in early trading as a cocktail of tech sector jitters and escalating Middle East tensions spooked investors. The sell-off follows a sharp decline on Wall Street overnight, where the Nasdaq Composite tumbled 2.1% on renewed fears that artificial intelligence exuberance has run ahead of reality. The ripples have crossed the Atlantic with force. London’s tech-heavy names are taking a beating: Scottish Mortgage Investment Trust, a bellwether for unlisted tech bets, fell 3.2%. Sage Group, the accounting software firm, dropped 2.4%.
But the real poison in the punchbowl is geopolitical. The attack on an Israeli-linked tanker off the coast of Oman over the weekend has sent a shiver through energy markets. Brent crude spiked above $82 a barrel, adding to cost pressures that the Bank of England can ill afford. The pound is wobbling too, sliding 0.3% against the dollar to $1.2750. A weaker sterling normally props up the FTSE’s international earners, but today the mood is too foul for that reflex to kick in.
Gilt yields are on the move again. The 10-year yield rose 5 basis points to 4.18%, a level that will have the Chancellor waking up in a cold sweat. Higher yields mean higher borrowing costs, and with a Budget looming, the fiscal arithmetic is getting uglier by the hour. The market is smelling a capital flight: investors are rotating out of risk assets and into the perceived safety of the dollar and US Treasuries.
The Tech wreck is not just a London story. Tokyo’s Nikkei fell 1.7%, and the Hang Seng in Hong Kong shed 1.2%. The sell-off is global, and it is indiscriminate. What started as a rotation out of AI hype has become a full-blown risk-off event. Central banks are caught in a bind: they want to ease but inflation is sticky. The Federal Reserve’s preferred inflation gauge, the core PCE index, came in at 2.6% last week, still above target. The ECB is in no better shape. The result is that rate cuts are being priced out for longer, and that repricing is hitting equity valuations.
For the UK, the worry is stagflation. GDP growth is anaemic, yet inflation remains stubbornly above the 2% target. The market is now pricing a 60% chance that the Bank of England holds rates steady in September. That is a sharp reversal from a month ago, when a cut was virtually baked in. The hawks on the Monetary Policy Committee will be feeling vindicated, but the real economy is paying the price.
Corporate news offers little solace. BP’s shares are down 1.1% despite a solid set of results, as the market frets about the impact of the oil price spike on consumer spending. Banks are moving lower too: Lloyds fell 1.5%, and NatWest 1.3%. Only defensive sectors like utilities and healthcare are holding up.
Investors are left asking: when does the bottom come? The VIX, Wall Street’s fear gauge, is above 20 for the first time in three months. The put-call ratio, a measure of bearish sentiment, is flashing warning signals. But selling begets selling. The path of least resistance is down, until either the Fed blinks or a geopolitical de-escalation materialises. Neither looks imminent.
The Market is punishing complacency. For years, investors have been told that dips are buying opportunities. This time feels different. The cocktail of tech overvaluation, sticky inflation, and geopolitical risk is potent. The FTSE may be cheap by historical standards, but cheap can get cheaper. The bottom line: volatility is back. Buckle up.
