The City woke to a sea of red this morning as the contagion from Wall Street's tech rout spread across the Atlantic, wiping billions from London's blue-chip indices. The FTSE 100 tumbled 3.2% by midday, its worst single-day decline since the pandemic panic of 2020, as investors fled risk assets with the urgency of a banker spotting a gilt auction failure.
The trigger, as ever, was an American sneeze: a collapse in Big Tech shares overnight, with the Nasdaq Composite shedding 5% as earnings from the usual suspects fell short of inflated expectations. But make no mistake, this is not merely a transatlantic cold; it is a structural crack in the edifice of inflated valuations that has propped up markets for years. London, ever the laggard, is feeling the pain acutely.
The FTSE 250, that barometer of domestic economic health, took an even harder hit, plunging 4.1% as mid-cap stocks were sold off indiscriminately. The rot spread beyond tech, with miners and banks bearing the brunt.
Rio Tinto fell 5% on fears of Chinese demand destruction, while Lloyds Banking Group dropped 6% as the prospect of thinner net interest margins loomed. The gilt market, meanwhile, offered no solace. The yield on the 10-year gilt rose to 4.
8%, a level not seen since the mini-Budget crisis of 2022, as investors demanded a higher risk premium for holding UK sovereign debt. This is the crux of the matter: the government's fiscal incontinence, coupled with sticky inflation, is scaring off foreign capital. Sterling fell below $1.
20, a level that historically signals a crisis of confidence. The Prime Minister's laissez-faire response, promising 'calm and stability', rings hollow when the numbers tell a different story. The Office for Budget Responsibility's latest forecasts, released yesterday, show public sector net borrowing running £20 billion ahead of projections, a gap that will have to be closed by higher taxes or deeper spending cuts.
The Bank of England, for its part, is caught between a rock and a hard place. Raising rates to defend the pound and curb inflation would crush growth; holding steady risks a rout in sterling and imported inflation. Governor Bailey's carefully worded statement this morning, pledging to 'monitor developments', was a masterclass in non-commitment.
But the market's message is clear: the era of cheap money is over, and the hangover is just beginning. For retail investors, the advice is simple: batten down the hatches. This is not a buying opportunity; it is a liquidity event.
The parallels to 2008 are overdone, but the underlying contagion mechanism is similar: a repricing of risk that exposes overleveraged positions. The biggest danger now is a feedback loop, where falling asset prices force margin calls, which in turn force more selling. London's fate is tied to Wall Street's, but its weaknesses are homegrown.
Until the government addresses the structural deficit and the Bank regains credibility, the FTSE will remain a falling knife.
