The rot is spreading. Asian markets took a hammering overnight, and London is next in line. The FTSE 100 is set to open sharply lower as the global tech sell-off that began on Wall Street last week intensifies.
Japan’s Nikkei fell 3.2%, South Korea’s Kospi dropped 2.8%, and Hong Kong’s Hang Seng lost 2.
5% as investors fled risk assets. The trigger? Earnings disappointments from US mega-cap tech stocks, coupled with hawkish central bank rhetoric.
The message from the Bank of Japan and the Federal Reserve is clear: cheap money is over. Market participants are now pricing in a higher-for-longer interest rate environment, and that is poison for the lofty valuations of the tech sector. The question is whether this is a healthy correction or the start of something nastier.
My bet is on the latter. The rot goes deeper than a few missed earnings. It is about the fragility of a market that has been propped up by liquidity for too long.
Capital flight is accelerating. We are seeing a rotation out of growth stocks into value and defensives. But even that trade looks crowded.
The FTSE 100, with its heavy weighting in financials and commodities, may offer some shelter, but it is not immune. The index is down 1.5% in early trading, led by tech-related names like Sage and Halma.
The real worry is the bond market. Gilt yields are spiking again, with the 10-year hitting 4.2%.
That is a red flag for equity valuations and a reminder of the UK's fiscal vulnerability. The government's spending plans are already under scrutiny, and a sustained rise in borrowing costs would undermine the chancellor's headroom. Meanwhile, sterling is weakening, adding to inflation fears.
The Bank of England is stuck between a rock and a hard place: raise rates to defend the currency and risk crushing growth, or hold steady and watch inflation fester. The market is losing confidence in its ability to steer a steady course. As for the sell-off, there is more pain ahead.
The tech sector had become a bubble of epic proportions, and bubbles do not deflate gently. They pop. The Nasdaq is down 12% from its peak, and I see at least another 10% to go.
The ripple effects will be felt across the Atlantic. The FTSE 100 will not escape unscathed, but the pain will be concentrated in the growth names. The banks and miners may even benefit from the rotation.
But do not be fooled: this is about risk aversion. When the world's most valuable companies are losing billions in market cap, no one is safe. The headlines in London will be about the worst day since the pandemic.
The trigger could be a bad US jobs report later this week or a fresh spike in bond yields. Either way, the sellers are in control. The bottom line?
This sell-off is not a buying opportunity. It is a warning. The era of free money is ending, and the market is pricing in the hangover.
For investors, the prudent move is to tighten seatbelts and cut exposure to the frothiest corners of the market. Cash is king. Or perhaps gold.
But do not expect the central banks to ride to the rescue. They are the ones turning off the taps.