The City of London woke up to a sea of red this morning as a brutal sell-off in US technology stocks cascaded across the Atlantic, wiping billions off the FTSE 100. The rout, triggered by disappointing earnings from Meta and Alphabet, has sent investors scrambling for cover, with the tech-heavy Nasdaq Composite suffering its worst single-day drop in over two years. London’s own tech darlings, from Sage Group to Darktrace, were caught in the downdraft, falling 4 to 6 per cent in early trading.
For those of us who have watched the frothy valuations in Big Tech with growing unease, this feels less like a bolt from the blue and more like a long overdue correction. The question now is whether this is a healthy shakeout or the beginning of a broader unwind. The answer, as always, lies in the data.
Let’s start with the gilt market. The yield on the 10-year gilt edged up to 4.2 per cent this morning, reflecting a flight to quality that is anything but orderly. Investors are pricing in higher for longer interest rates, a nasty combination for growth stocks whose future cash flows get heavily discounted in a high-rate environment. The Bank of England, fresh from its recent rate hold, must be watching nervously. If this rout deepens, it could tighten financial conditions faster than any rate hike would.
Meanwhile, sterling is taking a hit, sliding below $1.24 against the dollar. A weaker pound might boost the FTSE 100’s multinational earners, but it’s a double-edged sword. It stokes import inflation, which the MPC is trying to stamp out. And it signals a loss of confidence in UK assets precisely when the Treasury is about to issue a fresh tranche of gilts. The timing could not be worse.
The capital flight narrative is real. Hedge funds are reportedly reducing their net long positions on US equities at the fastest clip since March 2020. London is not immune. The FTSE 250, a better barometer of domestic economic health, is down 1.8 per cent, dragged lower by financials and consumer cyclicals. Even defensives like utilities are feeling the pain.
What makes this sell-off particularly unnerving is the breadth. It is not just tech. Financials are off 2 per cent, industrials down 1.5 per cent. It suggests a systemic repricing of risk, a realisation that the era of cheap money is well and truly over. The carry trade, the lifeblood of the past decade, is unwinding.
Central bank policy is now the only game in town. The Fed’s next move will be crucial. If Powell signals a pause, we might see a relief rally. But if he doubles down on the hawkish rhetoric, buckle up. The Bank of England, for its part, is caught in a bind. It cannot afford to cut rates to stimulate growth because inflation is still above target. It cannot hike without crushing the housing market. So it sits on its hands, hoping the market sorts itself out.
But markets are not rational actors. They are herds driven by fear and greed. Right now, fear is winning. The CBOE Volatility Index, Wall Street’s fear gauge, spiked above 25 for the first time this year. In London, the FTSE 100’s volatility index is not far behind.
The bottom line? This is a correction, not a crash. Valuations in tech were stretched, and a 10 to 15 per cent drawdown is healthy. But if the selling spreads to credit markets, if bond spreads blow out, then we have a problem. Watch the gilt yield curve. An inversion deepening is a harbinger of recession.
For now, the prudent play is to sit tight. Cash is a position. Let the noise settle. The market will find its level. But do not kid yourself: this is a reminder that the era of free money has ended, and the hangover is just beginning.
