The City is bracing for another day of carnage as a double blow of geopolitical strife and a tech rout sends investors scrambling for cover. Israel's reprisal strikes against Iran have sent a shiver through the markets, amplifying a tech selloff that was already shaping up to be the worst in months. The FTSE 100 opened sharply lower, but the real action is in the bond market, where gilts are surging as capital flees risk assets. The Bank of England, ever the firefighter, is on standby, but let's be honest: there's only so much a central bank can do when the world is burning.
Let's start with the obvious. The Middle East is a tinderbox, and the latest exchange of blows between Israel and Iran has lit a match. Oil prices are spiking, Brent crude jumping above $90 a barrel, which is the last thing the market needs. But it's not just oil. This is about confidence, or rather the lack of it. Investors are pricing in a wider conflagration, and they are not waiting to see who blinks. They are selling first and asking questions later.
Then there is the tech rout. The Nasdaq is down 5% in two days, and that spill over is hitting London's growth stocks like a sledgehammer. The valuations were frothy anyway, but now the air is rushing out. The question is whether this is a correction or the start of something uglier. Tech has been the market's engine room, and if that stalls, the whole economy feels the drag.
The Bank of England is "on standby", which is central bank speak for "we have no idea what to do but we need to look busy". They cannot cut rates because inflation is still stubborn, and they cannot raise rates because that would crush growth. So they are stuck, watching the selloff with the same grim expression we have. The best they can do is offer liquidity, ensure the wheels don't come off the gilt market. But that's a sticking plaster.
Gilt yields are falling, which sounds good, but it is not. Falling yields in a panic signal a flight to safety. Investors are buying government debt not because they trust the UK economy, but because they need a port in the storm. The real yield, adjusted for inflation, is still negative. That is a tax on savers and a subsidy for borrowers, and it is unsustainable.
The pound is taking a beating too, down against the dollar and the euro. A weaker pound will boost exports but it also imports inflation. The Bank of England looks damned if it does and damned if it doesn't.
What should investors do? Nothing. That is the tough truth. In a panic, the worst thing is to buy the dip because the dip might be a canyon. Cash is not trash, it is a lifeboat. Let the dust settle. Watch the oil price, watch the headlines, and when the Bank of England actually does something, then you might have a signal.
Until then, fasten your seatbelts. It is going to be a bumpy ride.
