The City is nursing a sour hangover this morning. The FTSE 100 opened sharply lower, caught in a pincer movement between a transatlantic tech rout and a fresh uptick in Middle East hostilities. For those of us who have been around long enough to remember the dot-com bust, the parallels are unsettling. Not that this is a crash, not yet. But the atmosphere has shifted from cautious optimism to outright unease.
The trigger, as ever, came from across the pond. The Nasdaq had another stinker, dragged down by a perfect storm of profit warnings and valuation angst. When your darling growth stocks start bleeding red, markets everywhere feel the pain. The FTSE, with its heavy weighting in financials and commodities, usually manages to shrug off tech tantrums. Today it cannot. The sell-off is indiscriminate.
Then there is the Middle East. Fresh attacks have reignited fears of a broader conflict, sending oil prices higher. Brent crude is nudging $80 again. For a UK economy already grappling with sticky inflation, this is the last thing we need. Higher energy costs feed straight into the consumer price index, making the Bank of England's job even more unenviable. Rates stay higher for longer. That is the market's current bet, and it is hammering gilt yields. The 10-year yield is up another five basis points as I write.
What worries me more than the daily noise is the underlying capital flight. Global investors are rotating out of risk assets with alarming speed. The dollar is strengthening, which is never good for emerging markets or commodity prices. Sterling is taking a hit, which might help exporters but does little for the cost of imports. In other words, the cost of living crisis gets another lease on life.
The fiscal backdrop adds to the gloom. The Chancellor's 'fiscal headroom' has evaporated faster than a pint in a City wine bar. With gilts under pressure, the government's cost of borrowing rises. That means less money for public services or more borrowing, neither of which is a vote winner. The market discipline is harsh but necessary. We have seen what happens when governments ignore it. Just ask the pension funds that nearly blew up last autumn.
So where do we go from here? The technical picture for the FTSE is deteriorating. Support at 7,500 looks fragile. If we break below that, the next stop could be 7,200. That would spell a correction of over 10% from the highs. Not a disaster, but a painful adjustment. The bulls will point to decent corporate earnings and a service sector that remains resilient. They are not wrong, but sentiment is a powerful force in the short run.
Central banks are not coming to the rescue. The Fed and the Bank of England are both in data-dependent mode, and the data is not cooperating. Core inflation remains sticky, and wage growth is too hot for comfort. Rate cuts are off the table for now. That means higher risk-free rates, which make equities look less attractive. The risk premium for holding stocks has to widen to compensate.
My advice to readers is simple: do not panic, but do be selective. This is a market for stock pickers, not index huggers. Look for companies with pricing power and strong balance sheets. Avoid the high-fliers that have run on hope rather than profit. Cash is not trash when the tide goes out. It is dry powder for the bargains that will emerge.
As for the FTSE, it will feel the heat until either tech finds its feet or the Middle East calms down. Neither looks likely this week. Keep your wits about you. The City has weathered worse. Just not recently.
