The London market opened sharply lower this morning as a fresh wave of risk aversion swept through global equities. The FTSE 100 fell 1.8 per cent in early trading, dragged down by a brutal sell-off in technology stocks and renewed geopolitical fears after attacks in the Middle East.
It was a classic flight to safety. Investors dumped risk assets and piled into government bonds, sending the 10-year gilt yield down 12 basis points to 3.94 per cent. Gold, the eternal hedge against chaos, rose 1.5 per cent to $2,415 an ounce.
The trigger was a double blow. First, disappointing earnings from a major US tech giant reignited fears that the artificial intelligence boom may be running ahead of fundamentals. Second, an escalation of hostilities in the Middle East served as a stark reminder that geopolitical risk has not gone away.
Let us be clear. This is not 2008. The banking system is not on the verge of collapse. But it is a corrective move, and a painful one for those who had become complacent. The tech-heavy Nasdaq Composite fell 2.5 per cent overnight, its worst one-day drop in three months. The selling was indiscriminate, with high-flying names losing ground and dragging down indices globally.
What concerns me most is not the sell-off itself, but the speed at which sentiment has turned. Only a month ago, markets were pricing in a soft landing, a Goldilocks scenario where inflation falls without a recession. That narrative now looks fragile. The market is suddenly pricing in a higher probability of a hard landing, or at least a prolonged period of uncertainty.
Central banks are in a bind. The Bank of England, like the Federal Reserve, wants to cut rates to support growth. But if inflation proves sticky, they cannot. And if geopolitical tensions push oil prices higher, inflation will indeed stay sticky. That is the nightmare scenario for investors, with the dual spectres of stagflation and capital flight.
We are already seeing capital flight from emerging markets, but now there are murmurs of investors rotating out of developed markets too. The dollar is strengthening, which puts pressure on the pound and on UK assets. The Bank of England will have to walk a tightrope.
The yield on the 10-year US Treasury fell to 4.10 per cent, while the 2-year yield fell more sharply, steepening the curve. That is a sign that the market expects the Fed to cut rates, but perhaps because of a downturn, not because inflation is under control. That is a worrying signal.
As always, the market will find a level. But for now, the bulls have been mauled. The question is whether this is a buying opportunity or the beginning of a more serious correction. My instinct tells me we have not seen the bottom yet. Volatility is back, and it pays to be cautious.
One thing is certain: the days of free money and easy gains are well and truly over. The market is now pricing risk more realistically. For long-term investors, that is healthy. For those trading on margin, it could be disastrous.
The bottom line? Brace for more swings. The market is repricing risk, and that process is never comfortable.
