The party on Wall Street has come to an abrupt halt. The S&P 500 is down 2.3% in afternoon trading, with the Nasdaq suffering a 3.
1% rout, as investors flee the once high-flying tech sector. The catalyst appears to be a combination of disappointing earnings from Alphabet and Microsoft, coupled with hawkish comments from Federal Reserve Governor Christopher Waller, who suggested rates may need to stay higher for longer to combat sticky inflation. The result is a classic repricing of risk: the 'Big Tech' trade, which has carried indices to record highs, is now unwinding with surgical precision.
The so-called 'Magnificent Seven' stocks are bleeding: Apple down 4%, Amazon off 3.5%, and Nvidia shedding 5%. The CBOE Volatility Index, or VIX, has spiked above 20, a level not seen since the regional banking crisis of March 2023.
Investors are rushing to the exits, and the safety of government bonds is back in vogue. The 10-year US Treasury yield has fallen 12 basis points to 4.55%, a move that signals a flight to quality rather than any optimism about economic growth.
Across the Atlantic, London is bracing for contagion. The FTSE 100 is already in negative territory, down 0.8%, as the sell-off spreads to European bourses.
The DAX and CAC 40 are both off over 1%. For the UK, the concern is twofold: first, the direct impact on London-listed tech stocks, which are few but mighty (think Sage and Aveva); second, the indirect effect on global growth prospects. The Bank of England’s Monetary Policy Committee, already grappling with stubbornly high services inflation, will be watching these developments nervously.
A sustained sell-off could tighten financial conditions, effectively doing the BoE’s job for it. But it could also signal a broader economic slowdown that might eventually force rate cuts. For now, the market is pricing in a higher probability of a rate cut in August: swap markets show a 50% chance, up from 40% yesterday.
Capital flight from the dollar is noticeable, with the greenback weakening against the yen and the Swiss franc. Sterling has held its ground, trading at $1.27, but that may be short-lived if the sell-off deepens.
The bottom line: this is a market recalibration. The 'higher for longer' narrative on rates has finally collided with reality. Tech valuations, inflated by the AI frenzy, are being tested.
And the patient investor will look through this noise, but the short-term pain is real. Stay tuned. London markets open in less than an hour.
