By Marc Jones
LONDON, Sept 14 (Reuters) – The AI-linked rally that has seen world stock markets soar over the last two years is showing growing signs of vulnerability, global central bank umbrella body, the Bank for International Settlements, said on Monday.
In a new report, the BIS said investors were becoming “increasingly cautious” about the profitability of future AI investments, especially as the leverage of major U.S. tech firms continued to rise.
“The AI momentum, which had propelled equity markets and contributed to the resilience of the global economy of the last year, has begun to show growing signs of vulnerability,” the BIS’ head of economic analysis, Frank Smets, told reporters.
The comments were made on Friday ahead of the BIS report’s Monday publication. AI-connected stocks were down sharply on Monday after the heads of a number of top AI firms warned at the weekend that the pace of the technology’s development needed to be slowed to prevent threats to humanity.
The BIS report also pointed to an uncertain global backdrop of strains on public finances, exacerbated by geopolitical tensions and volatile energy prices.
The hundreds of billions of dollars worth of debt AI firms have been issuing could also be contributing to the rise in government bond market borrowing costs, known as yields, on top of the long-held concerns about the sustainability of debt levels.
“It’s related to the fiscal fragility that comes also with higher uncertainty in the world economy,” Smets said referring to the recent pressures in bond markets.
Nevertheless, he added that there were “no signs of stress” overall and that investors’ risk appetite had remained “remarkably resilient” in recent months.
INFLATION COMMUNICATION
Dubbed the central bank to the world’s central banks, the BIS has given regular warnings about both global debt levels and potential stock market bubbles in recent years.
“Whether this resilience (in markets) can be sustained, especially if upward pressures on yields continue, remains, however, uncertain,” Smets said.
He also echoed BIS chief Pablo Hernandez de Cos’ warning last week of the financial stability risks posed by AI.
“What we are most concerned on in this (AI) area is the rapid increase in debt and leverage,” Smets said. “And the fact that many of these financing deals are quite opaque. They’re often off balance sheet. They have sort of circularity in them.”
The report also looked in depth at the private market funding that has been pouring into AI in recent years.
Aggregate borrowing by tech firms has risen from around $22 billion, or 22% of total private credit, in 2010 to over $1 trillion, or 44%, by 2025. In total, outstanding loans of any type amount to almost $2.5 trillion, it added.
Another of its studies used AI to analyse thousands of central bank speeches and reports. It showed that “core inflation” metrics that strip out energy price peaks and troughs are being cited more frequently and in greater variety.
While the trend reflected changing economic conditions, it said “the growing complexity of central bank messaging may pose challenges for effective communication with the public”.
(Reporting by Marc Jones; Editing by Alexander Smith )
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