The Bank of England sees trouble ahead for global financial markets if investors U-turn on the prospects for artificial intelligence (AI) ahead.
The Bank’s Financial Policy Committee said in its latest update on the state of the financial system that there was also a risk of a market correction through intensifying worries about US central bank independence.
“The risk of a sharp market correction has increased,” it warned, while adding that the risk of “spillovers” to these shores from such a shock was “material”.
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Fears have been growing that the AI-driven stock market rally in the United States is unsustainable, and there are signs that a growing number of investors are rushing to hedge against any correction.
This was seen early on Wednesday when the spot gold price surpassed the $4,000 per ounce level for the first time.
Analysts point to upward pressure from a global economic slowdown driven by the US trade war, the continuing US government shutdown and worries about the sustainability of US government debt.
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US government shuts down
The political crisis in France has also been cited as a reason for recent gold shifts.
Money has also left the US dollar since Donald Trump moved to place his supporters at the heart of the US central bank, repeatedly threatening to fire its chair for failing to cut interest rates to support the economy.
Jay Powell’s term at the Federal Reserve ends next spring but the White House, while moving to nominate his replacement, has already shifted the voting power and is looking to fire one rate-setter, Lisa Cook, for alleged mortgage fraud.
She is fighting that move in the courts.
Financial markets fear that monetary policy will no longer be independent of the federal government.
“A sudden or significant change in perceptions of Federal Reserve credibility could result in a sharp repricing of US dollar assets, including in US sovereign debt markets, with the potential for increased volatility, risk premia and global spillovers,” the Bank of England said.
British government borrowing costs are closely correlated with US Treasury yields and both are currently elevated, near multi-year highs in some cases.
It’s presenting Chancellor Rachel Reeves with a headache as she prepares the ground for November’s budget, with the higher yields reflecting investor concerns over high borrowing and debt levels.
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On AI, the Bank said that 30% of the US S&P 500’s valuation was made up by the five largest companies, the greatest concentration in 50 years.
Share valuations based on past earnings were the most stretched since the dotcom bubble 25 years ago, though looked less so based on investors’ expectations for future profits.
A recent report from the Massachusetts Institute of Technology found that 95% of businesses that had integrated AI into their operations had yet to see any return on their investment.
“This, when combined with increasing concentration within market indices, leaves markets particularly exposed should expectations around the impact of AI become less optimistic,” the statement said.
