Bank of England Says AI Bubble Burst Could Drive Simultaneous Selling of U.S. Stocks and Bonds, Hit U.K
A Bank of England analysis says a burst in the artificial-intelligence stock bubble could spread to the U.K., affecting share prices, U.K. government bond yields and corporate credit markets. In a blog post, Bank of England staff said disappointing earnings from large U.S. technology companies could be interpreted by investors as a downgrade to the outlook for future U.S. productivity. Investors might then sell U.S. assets rather than seek them as a haven. That could weaken the dollar and remove one source of support that has helped cushion the U.K. and other economies during periods of financial-market stress. Daniel Ostry, Roger Vicquéry and Emilio Zaratiegui of the Bank of England’s Global Analysis division wrote: “If expectations for productivity gains driven by artificial intelligence fail to materialize, investors may sell U.S. bond and stock markets at the same time.” They said this would be “in sharp contrast to typical stress scenarios such as the 2008 global financial crisis,” when demand for haven assets pushed the dollar higher. That benefited the U.K. to some extent by improving the competitiveness of British exports and increasing the sterling value of dollar-denominated holdings. The surge in valuations of U.S. technology companies has raised concerns that a sharp pullback in their share prices could spill over and damage the British economy, even though no leading AI company is listed in London. On Thursday, U.S. stocks traded near record highs as momentum in the AI trade strengthened. In July, the Bank of England warned that U.S. stock valuations had become increasingly stretched and that a growing number of AI companies were taking on debt to fund massive investment. Bank of England Governor Andrew Bailey said last month that the economic impact of an AI bubble bursting could prompt the central bank to respond with interest rates. Bank of England staff based their analysis on earnings announcements and share-price movements since 2000 for the seven major technology companies. They estimated that a 1% negative earnings shock could weaken the dollar, while sterling, measured on an effective exchange-rate basis, could appreciate by about 0.5% within roughly one week. The analysis also estimated that the FTSE 100 could fall by about 1% within two days. Nine days after the shock, the yield on 10-year U.K. government bonds could be about 6.5 basis points lower, while U.K. credit spreads could widen by about 10 basis points within two weeks. The authors concluded: “These shocks show that the impact originating from large technology companies would not be confined to large technology companies themselves.”
In a blog post, Bank of England staff said disappointing earnings from large U.S. technology companies could be interpreted by investors as a downgrade to the outlook for future U.S. productivity. Investors might then sell U.S. assets rather than seek them as a haven. That could weaken the dollar and remove one source of support that has helped cushion the U.K. and other economies during periods of financial-market stress.
Daniel Ostry, Roger Vicquéry and Emilio Zaratiegui of the Bank of England’s Global Analysis division wrote: “If expectations for productivity gains driven by artificial intelligence fail to materialize, investors may sell U.S. bond and stock markets at the same time.”
They said this would be “in sharp contrast to typical stress scenarios such as the 2008 global financial crisis,” when demand for haven assets pushed the dollar higher. That benefited the U.K. to some extent by improving the competitiveness of British exports and increasing the sterling value of dollar-denominated holdings.
The surge in valuations of U.S. technology companies has raised concerns that a sharp pullback in their share prices could spill over and damage the British economy, even though no leading AI company is listed in London. On Thursday, U.S. stocks traded near record highs as momentum in the AI trade strengthened.
In July, the Bank of England warned that U.S. stock valuations had become increasingly stretched and that a growing number of AI companies were taking on debt to fund massive investment. Bank of England Governor Andrew Bailey said last month that the economic impact of an AI bubble bursting could prompt the central bank to respond with interest rates.
Bank of England staff based their analysis on earnings announcements and share-price movements since 2000 for the seven major technology companies. They estimated that a 1% negative earnings shock could weaken the dollar, while sterling, measured on an effective exchange-rate basis, could appreciate by about 0.5% within roughly one week.
The analysis also estimated that the FTSE 100 could fall by about 1% within two days. Nine days after the shock, the yield on 10-year U.K. government bonds could be about 6.5 basis points lower, while U.K. credit spreads could widen by about 10 basis points within two weeks.
The authors concluded: “These shocks show that the impact originating from large technology companies would not be confined to large technology companies themselves.”