Risk Aversion In Technology Sector
The outlook for European morning trading indicates limited relief for market participants.
That opening points to an unmistakable shift in sentiment. Investors have started shedding risk, and it’s coming through with strong directional moves. Futures in the US, particularly the S&P 500, point to heavier selling ahead; a 5% drop ahead of the session is not something that typically happens without broader concerns looming. The fact that equity pressure is focused heavily on the technology space suggests profit-taking or worry about valuations, especially after such a long stretch of strength there.
The Hang Seng showed signs of panic selling, shedding over 13% at one stage before regaining some ground. That sort of sharp move is not easy to ignore and rarely happens in isolation. Asian markets often give a preview of how the rest of the day might unfold, even more so when the sell-off reaches those levels.
Yields heading lower on the US 10-year — now sitting around 3.89% — confirm the rush into perceived safety. That shift from stocks to bonds is telling of how investors are repositioning. At the same time, the Japanese yen is nearing 145 per dollar, which not only tells us something about interest rate differentials, but also hints at building stress in foreign exchange markets. Moves towards that level tend to invite the possibility of official statements, especially given the sensitivity there in the past.
Volatility in Broader US Indices
Volatility now has to be monitored, particularly in the broader US indices. If losses reach 7% in the main equity benchmarks, circuit breakers will come into play — a mechanism that halts trading to cool off panic selling. Last time we saw that employed frequently was March 2020, and while this isn’t the same backdrop, the mechanism remains. It also means that market participants need to calibrate their models to that threshold and avoid unnecessary exposure near the trigger points.
With European markets not offering much in the way of optimism, short-term traders need to be nimble. For those positioned in index derivatives, we find that spreads are beginning to widen — a clear sign that liquidity is thinning as fear builds. The relief that tends to come with dips has been short-lived lately, and until confidence returns, attempts to buy into weakness need to be done with fast exits in mind.
The sharpness of the moves overnight and in pre-market US trading means that a reactionary pattern may develop through the week. That will include stretched volatility readings, erratic order flow, and higher correlation among risk assets. It’s worth noting that a market moving consistently across asset classes — from equities to bonds to currency — usually means sentiment is the driving force. We’ve already seen portfolios start to lean more defensive through protective positions.
Powell has been quiet in recent days, but his message from last week still hangs over the market. That tone is being followed through in asset prices more swiftly than in statements. For derivative desks, that has implications on both delta exposure and margin efficiency. We are all balancing how much risk is still on the books against how quickly correlations and vol sensitivities can change as flows spike.
As spreads open and volatility rises, timing becomes the main point of emphasis. Entries can still be justified, particularly on corrections or failed breakdowns, but must be smaller in size, favouring defined-risk structures. Option volumes are on the rise — don’t be surprised to see implied volatility move ahead of realised in many equity names, especially where uncertainty is highest.
