The City of London is having a nervous morning. The FTSE 100 opened sharply lower, tracking a brutal tech sell-off on Wall Street and escalating hostilities in the Middle East. It’s the kind of double dose of bad news that gets a fund manager out of bed with a headache.
The trigger, as ever, came from across the pond. The Nasdaq had its worst day since the autumn, led by a rout in the ‘Magnificent Seven’ tech giants. Investors finally realised that when you pay 30 times earnings for a company that makes nothing but promises, you are playing a very dangerous game. The AI euphoria that carried markets to absurd heights is now being priced out. And when tech sneezes, the rest of the world catches a cold.
That cold is now compounded by a hot war. Iran’s missile barrage against Israel sent oil prices spiking, and the ‘fear gauge’ VIX is doing its best impression of a rocket launch. Safe havens are rallying: gold is up, the yen is stronger, and US Treasuries are seeing a flight to quality. But for the UK, this is a nasty cocktail. We import most of our oil, so petrol prices will rise. And gilt yields are already creeping higher, which means the Chancellor’s fiscal headroom is evaporating by the hour.
Let’s talk about gilt yields. The 10-year yield is now pushing 4.3%. That might not sound like much, but for a government that borrowed £200 billion last year, every basis point is a cross on the GDP ledger. The Bank of England must be watching this with alarm. If inflation expectations become unanchored, they will have to reverse course on rate cuts. The market is now pricing in a 60% chance of a hold in June. Two weeks ago that was 20%.
The Middle East risk is not just about oil. It is about supply chains, shipping lanes, and the stability of the Gulf states. The Strait of Hormuz is the world’s most important chokepoint for oil. If that gets blockaded, we are looking at a 1973-style crisis. That scenario is still low probability, but the market is starting to price in a small chance of a big disaster. That is the real source of the jitters.
What does this mean for your portfolio? If you are heavy on growth stocks, you are getting crushed. The rotation is on: from tech to energy, from growth to value, from risk to safety. But don’t think energy is a sure thing. If the conflict de-escalates, oil will fall faster than it rose. And defence stocks, the other ‘war play’, are already priced for a world war. The best thing to do right now is nothing. The worst is to panic sell. The market will recover; it always does. But the path will be volatile, and the City will be on edge for weeks.
The bottom line: this is not a 2008 moment. It is a correction driven by geopolitical risk and overvaluation. The economy is not broken. But the market is adjusting to a new reality where cheap money is gone and wars are back. Strap in.
