The sell off hits Europe, as UK consumer slumps under expected weight of budget

The premise for stocks on Thursday was strong: Nvidia’s results were stunning, and the US unemployment rate rose, sparking hope that the FOMC may consider a rate cut next month. However, there was a categorical reversal in sentiment, stocks plunged, intra-day volatility surged to its highest level since April, and Nvidia’s share price shed 3%. Stocks are now on track to register their worst week since President Trump’s tariff plan ripped through markets back in April.

Technical signals look shaky

The Vix index has surged, and technical signals are also worth watching to see where stocks go next. The S&P 500 fell below its 50-day moving average earlier this week, which suggests that near term momentum has shifted to the downside. After Thursday’s 1.5% drop in the S&P 500, the index is now testing the 100-day sma, a drop below here could signify a deeper move, that could, ironically, help force the Fed’s hand to cut rates next month.

Walmart, the harbour in the storm

The market mood was reflected in the best and worst performers on the S&P 500, Walmart led US stocks, rising more than 6%, as it posted strong results and provided a safe harbour from  the market storm. In contrast, Robinhood and crypto-linked companies slumped, as the crypto rout continues. Bitcoin fell below $85,000 this morning, and appears to be heading back towards its April low at $77,000.

No single switch that can flip market sentiment

So, what are the drivers for the sell off? Unlike the April sell off, when President Trump’s tariff threats caused chaos on global markets, there is no single driver of the November sell off. There are concerns that the US economy will slow, the Fed won’t cut rates, and the market is still having an existential crisis about lofty valuations for AI stocks.  A large fear is that the AI spending frenzy may not generate the returns needed to justify the investments, which is why tech stocks have been hammered this month.

Market has buyer’s remorse over AI binge

It was easier to recover from the tariff slump in stocks, since one man, President Trump, had to do one thing, reduce tariffs, for stocks to recover. This time it’s different. There is no single thing that needs to change, the market instead has buyer’s remorse over pushing tech stock valuations too high, and this will take time to work its way out of the system.

Too soon for stocks to stage a meaningful recovery

No corner of the market has been spared, the MSCI world index is also on track to post a 3% loss for this week, on par with the 3.4% decline for the Nasdaq. European stocks are set to follow US markets lower, while early futures markets predict stabilization in the US as we end the week. Futures are currently pointing to a small gain for the S&P 500, and a mild loss for the Nasdaq. However, stocks have tended to fall at the end of the week so far in 2025, so if the current trend remains, it may be too soon for markets to stage a meaningful recovery on Friday.  

As we end the week, there are other issues to deal with. Japanese officials have given their starkest warning yet that they will intervene to stem the sell off in the yen. USD/JPY has pulled back slightly after reaching a high above 157.80 on Thursday. The UK is also in focus as we are less than a week out from the much-anticipated budget.

UK retail sales in retreat as consumers take fright at Budget

There are more signs that the consumer in the UK is having a strong negative reaction in advance of this budget. GfK reported that consumer confidence had fallen deeper into negative territory, and headline retail sales for October slumped by 1.1%. This was the first fall in sales including supermarkets, clothing stores and online retailers since May. Some of the decline may be in advance of Black Friday, however, the greater concern is that the consumer is in long term retreat as it tries to protect itself from a government who sees businesses and workers as piggy banks.  

Government borrowing rises more than expected, yet again, and no sign of spending restraint expected in the Budget

As the consumer slumps, the government borrowed more than expected. The October public sector net borrowing figure was $17.4bn, worse than the $15bn expected. It was the third largest borrowing for the month of October on record, which will add fuel to rumours that the Treasury will have to boost gilt issuance this year to keep up with this government’s spending demands.

Today’s data highlights the doom loop for the UK: the government continues to spend with aplomb in largely unproductive areas of the economy, as the consumer retreats in the face of a tax grab budget that has killed both consumer and business confidence.

The pound remains resilient amidst budget chaos

The pound is weakening after this dismal data. GBP/USD is back below $1.31 and is extending losses we move through the morning. However, bond yields are stable and the pound’s ability to stay above $1.30 is startling. GBP does not look like a global outlier as we move towards the Budget. The dollar is the strongest performer in the G10 FX space so far this week, and so far, GBP is mid-table.