BIS says global market AI momentum showing signs of vulnerability

BIS says global market AI momentum showing signs of vulnerability

The artificial intelligence (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 (BIS), said yesterday.

Investors were becoming "increasingly cautious" about the profitability of future AI investments, especially as the leverage of major US tech firms continued to rise, the BIS said in a report.

"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," BIS economic analysis head Frank Smets told reporters on Friday ahead of the report’s publication.

Visitors walk past a display depicting artificial intelligence and a human hand at the China International Supply Chain Expo in Beijing on June 22.

AI-connected stocks were down sharply yesterday 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.

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 US$22 billion, or 22 percent of total private credit, in 2010 to over US$1 trillion, or 44 percent, by last year. In total, outstanding loans of any type amount to almost US$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."