Markets are priced for perfection, and perfection, as the City knows all too well, is a fleeting mistress. The FTSE 100 has shed over 3% this week alone, a tremor that has sent the Treasury scrambling for its emergency toolkit. Sources close to Number 11 confirm that Chancellor Jeremy Hunt is preparing a series of 'targeted interventions' to combat what they euphemistically call 'tech-led volatility.' But let us call it what it is: a capital flight panic.
The trigger was a nasty spill in US tech stocks after a string of disappointing earnings from the Magnificent Seven. London, ever the shadow of Wall Street, caught the cough. But the speed of the sell-off in UK-listed tech and growth stocks suggests something deeper. The VIX, our favourite fear gauge, has spiked above 30, a level that usually prompts a stiff drink and a review of one's hedging strategy.
The Treasury's proposed measures are still under wraps, but the rumoured options tell a story. A temporary ban on short-selling? A circuit breaker for high-frequency trading? Or perhaps the nuclear option: a direct intervention in the gilt market to cap yields. Each of these choices reeks of desperation. The irony is thick: the government that preaches fiscal discipline is now considering market manipulation to calm the nerves of traders.
Let us examine the numbers. UK gilt yields have already risen by 50 basis points in the last fortnight, driven not by inflation expectations but by a liquidity black hole. Pension funds, those lumbering giants, are being forced to sell gilts to meet margin calls from their LDI strategies. It is the echo of 2022's 'Truss moment' but with a tech label. The Bank of England, still nursing a hangover from that debacle, is watching nervously.
The deeper problem is a loss of confidence in UK as a destination for capital. The tech sector, once the poster child for British innovation, is now seen as a regulatory minefield. The recent antitrust moves against Big Tech have spooked investors. And when you add the persistent inflation headache (CPI still above 4%), you have a recipe for capital flight. The pound has already weakened 5% against the dollar this year.
What can the Treasury actually do? A ban on short-selling would be a symbolic gesture, but it would do nothing to address the underlying cause: a mismatch between asset prices and reality. History teaches us that market interventions often create more problems than they solve. The US tried a short-sale ban in 2008, and it did little to stem the tide. Circuit breakers are just a pause button; they don't fix the broken engine.
There is a more fundamental issue at play here: the market is finally repricing risk after years of ultra-loose money. The era of free capital is over, and the adjustment is painful. The Treasury's job is not to prevent the adjustment but to ensure it doesn't turn into a disorderly crash. That requires transparency, not ad hoc interventions.
My bet is that the Chancellor will opt for a 'soft' measure: a coordinated statement with the BoE and the FCA to reassure markets, perhaps combined with a tweak to the LDI rules. Anything more aggressive would risk spooking the bond vigilantes, who are already eyeing the UK's fiscal position with suspicion. The national debt is 100% of GDP, and the current account deficit is widening. This is no time for heroics.
For the retail investor, the message is clear: volatility is here to stay. The old adage 'sell in May and go away' may hold more truth this year. But those with a longer view might see opportunity in the chaos. The UK market is cheap by historical standards, and a correction could flush out the weak hands.
In the end, the markets will do what markets do: correct. The Treasury can delay the inevitable, but it cannot change the arithmetic. As we used to say in the City, you can't beat the tape. The only question is how messy the landing will be.
Alastair Thorne, Chief Financial Editor.
