The City of London is bracing for another savage session on Thursday as the twin shocks of a tech sector rout and escalating Middle East hostilities ignite a global market sell-off. The FTSE 100 plunged 2.8% in early trading, wiping out over £50 billion in market capitalisation, as investors fled risk assets for the perceived safety of government bonds and gold.
But the real story lies in the bond market: the yield on the 30-year gilt has crashed 40 basis points to 4.2%, a level not seen since the Brexit referendum. This is not a flight to quality.
This is a panic. The tech rout, triggered by yet another round of profit warnings from Silicon Valley darlings, has now spread to London’s growth stocks. The FTSE TechMARK index has fallen 15% in three days, with investors questioning the valuations of companies that have never turned a profit.
Meanwhile, the missile strikes on Saudi Arabia’s oil infrastructure have sent crude prices soaring above $90 a barrel, threatening to reignite inflation just as the Bank of England is trying to convince us that the worst is over. The BoE’s governor, Andrew Bailey, is now caught between a rock and a hard place. If he raises interest rates to defend the pound, he risks crushing the housing market and choking off any recovery.
If he holds firm, he watches the pound slide and inflation spike. The reality is that UK pension funds, already battered by the liability-driven investment crisis of 2022, are once again facing margin calls as gilt yields oscillate violently. The Bank of England’s Financial Policy Committee will be meeting this afternoon; I expect they will announce an emergency bond buying programme to stabilise markets.
But let’s be clear: this is not a solution. It is a sticking plaster. The underlying problem is that the UK economy is addicted to cheap money, and the withdrawal is proving painful.
Capital is fleeing London for New York and Singapore. The tech rout is a global phenomenon, but the pension crisis is uniquely British. The government’s fiscal credibility has been shattered by years of overspending.
The next few days will be a test of whether Rishi Sunak’s administration has the stomach for the tough decisions needed. My advice to investors: brace for more volatility. The bottom line is that the market is punishing complacency.
