The City woke to a nervous open this morning as a fresh bout of volatility swept across global equity markets, driven by deepening concerns over the valuation of the technology sector. The FTSE 100, heavily weighted towards more traditional industries, initially held its ground, but the contagion from Wall Street’s tech rout proved unavoidable. London’s index has shed over 1.5% in early trading, with the more risk-on FTSE 250 taking an even bigger hit.
The trigger, as ever, came from across the Atlantic. The Nasdaq Composite suffered its worst single-day decline in over a month, led by a sell-off in high-growth names that had until recently been the darlings of the bull market. Investors are suddenly scrutinising cash flows and interest rate exposure, a tedious reality check after months of speculative fervour. The result: a sharp spike in the CBOE Volatility Index (the VIX), Wall Street’s fear gauge, which has jumped above 20 for the first time since the regional banking crisis earlier this year.
In London, the tech-heavy sectors are bearing the brunt. The FTSE 350 Technology Index has fallen 3.2%, with software and semiconductor stocks leading the declines. This is a painful reminder that even our more sober listings are not immune to the fever dreams of Silicon Valley. Yet, there is a silver lining for the British economy, and it comes from an unlikely source: our embattled banking sector.
The International Monetary Fund, in its latest Financial Sector Assessment Programme report for the UK, has given a resounding vote of confidence to the resilience of British banks. The IMF’s stress tests, which modelled a severe recession combined with a housing market crash and rising unemployment, concluded that the Big Four would maintain capital ratios well above regulatory minimums. The Fund specifically praised the Bank of England’s ‘proactive’ approach to capital buffers and the ‘robust’ risk management standards adopted since the 2008 crisis.
This is a significant feather in the cap for the Prudential Regulation Authority, which has had to defend its increasingly stringent regime against accusations of stifling growth. The IMF’s analysis suggests that, unlike their American counterparts, British banks are well positioned to weather a storm without tapping taxpayer bailouts. For investors, this means that the dividends and buybacks that have been flowing freely from Barclays, Lloyds, HSBC, and NatWest are likely sustainable. The banking sector’s resilience is a key reason why the FTSE 100 has not fallen as hard as other indices.
But this endorsement should not foster complacency. The IMF also flagged the growing risks from the non-bank financial sector, which now accounts for over half of UK financial assets. Shadow banking, with its opacity and leverage, could still trigger a credit event that would expose the broader system. Moreover, the UK’s gilt market remains a nervous beast, with 10-year yields climbing back above 4.5% this morning as the inflation threat refuses to die. Higher yields, of course, mean higher borrowing costs for the government and for firms looking to refinance debt.
The Bank of England, meanwhile, finds itself in a tight spot. With inflation still stubbornly above target and wage growth accelerating, the hawks on the Monetary Policy Committee are pressing for another rate hike. But with the economy flatlining and the property market starting to crack, the doves argue that tighter policy would be a mistake. The IMF’s endorsement of our banks, however, gives the BoE a bit more ammunition to keep rates higher if needed. It reduces the risk that a rate hike would trigger a banking crisis.
The real question for investors is whether this tech sell-off is a healthy correction or the beginning of a more sinister downtrend. If the US economy slips into recession, British exporters will feel the pain. But for now, our banks stand solid, and that is no small comfort in a world of uncertainty. The market may be nervous, but there is method in the madness: sell the hype, buy the resilience. And right now, British banking is the closest thing to a safe harbour.
