It was another grim morning in the Square Mile as gilt yields crept higher and the FTSE 100 opened in the red. The trigger, as ever, was a cocktail of fear and uncertainty, with tech stocks taking a beating and the Middle East once again proving a powder keg for global markets. For those of us who have spent decades watching the ticker tape, the pattern is all too familiar: a flight from risk, a scramble for safe havens, and the gnawing suspicion that central banks have lost control of the narrative.
First, the tech sector. America's FAANGs have been stumbling for weeks, but yesterday's sell-off was particularly brutal. The Nasdaq composite shed over 2% on concerns that artificial intelligence hype has finally met reality. The darling of the moment, Nvidia, lost nearly 5% after a hedge fund manager questioned whether its valuation could ever justify the earnings. It is a textbook case of 'buy the rumour, sell the fact.' The problem is that the entire market has been riding on the coattails of a handful of tech stocks. When they sneeze, the rest of the index catches pneumonia.
Then there is the Middle East. The overnight news of drone strikes on oil infrastructure in the Gulf sent crude prices spiking. Brent crude jumped 3% before settling, and investors immediately began pricing in risk. The foreign office has advised against non-essential travel, but the City knows that the real travel ban is on capital: money is fleeing emerging markets and pouring into gold, the dollar, and British gilts. That might sound good for the UK, but it is a double-edged sword. A rising pound hurts exporters, and the prospect of higher energy prices will feed directly into inflation.
Inflation. That word again. The Bank of England has been trying to jawbone the market into believing that interest rate cuts are on the horizon, but the data tells a different story. Core inflation remains stubbornly above 4%, and wage growth is still accelerating. The market is now pricing in a 40% chance of a rate hike before the end of the year. The irony is palpable: the very measures designed to soothe the markets are now causing them to panic. The Bank has lost credibility, and once that goes, you might as well throw in the towel.
Meanwhile, the fiscal picture is no prettier. The Chancellor's Spring Statement promised restraint, but the bond market is not buying it. Ten-year gilt yields have risen to 4.6%, their highest since the Truss-Kwarteng debacle. The IMF has warned that UK debt is unsustainable without further cuts, but what politician has the stomach for austerity in an election year? The market will demand its pound of flesh eventually. It always does.
So what is the bottom line? Investors should brace for more volatility. The summer months are traditionally quiet, but this year the noise is deafening. My advice: reduce exposure to tech, hedge against energy spikes, and for heaven's sake, do not chase yields. The market is a cruel mistress, and she is about to remind us all who is in charge.
