The vertigo from Silicon Valley has hit the Square Mile with a vengeance. US equities suffered their worst single-day slide in weeks yesterday, led by a brutal sell-off in the big tech names that have propped up the bull market for so long. The S&P 500 shed 2.
3 per cent, the Nasdaq composite plunged over 3 per cent, and the FTSE 100, ever the follower in a transatlantic dance, dropped 1.8 per cent as the session wore on. The narrative, as ever, is about interest rates, but this time there is a twist.
Investors are finally waking up to the reality that the Federal Reserve's higher-for-longer message is not a bluff. The yields on ten-year Treasuries briefly touched 4.8 per cent again, and the market began to price in the cold truth: that the era of cheap money is well and truly over.
For Big Tech, which trades on future earnings discounted at today's rates, that is a body blow. Apple, Microsoft, Amazon, Alphabet, Meta: all fell sharply. The Magnificent Seven have become the Terrifying Seven.
The London market, which has been a relative haven thanks to its weighting in energy and mining, could not escape. The FTSE 250, more domestically focused, took an even harder hit, falling over 2 per cent. The real concern now is contagion.
If American consumers start to feel the pinch from reduced tech wealth and higher borrowing costs, the global demand for British goods and services will follow suit. The Bank of England is watching this with hawkish alarm. It has its own inflation battle, but a US slowdown would drag down UK growth, just as the economy shows signs of a fragile recovery.
The gilt market, too, is jittery. The yield on the 10-year UK gilt rose six basis points on the day, reflecting the rise in global bond yields. Capital flight, that old City fear, has not yet materialised, but the direction of travel is clear.
Investors are moving to cash or short-dated bonds. The era of 'there is no alternative' to equities is over. The question now is whether this is a correction or the beginning of a bear market.
My guess: it depends on the data. If next week's US payrolls come in hot, the sell-off will accelerate as the Fed's hand is forced. If they are soft, we might see a bounce.
But the structural trend is ugly. Fiscal deficits in both the US and UK are ballooning. Governments are borrowing more, crowding out private investment.
The market is finally pricing in that risk. The party, it seems, has been crashing for a while. Now the hangover is here.
