The Bank of England has warned that a potential collapse in the artificial intelligence stock bubble could spill over into the United Kingdom, affecting domestic share prices, gilt yields, and corporate credit markets. In a blog post, BoE staff said that if earnings from major US tech companies disappoint, investors might interpret this as a downgrade to America's future productivity outlook, prompting them to exit US assets rather than seeking safety in them.
This could weaken the US dollar and erode a factor that has historically buffered economies like the UK during periods of financial market stress. "If the anticipated productivity gains from AI fail to materialise, investors could simultaneously flee both US bond and equity markets," wrote Daniel Ostry, Roger Vicquéry, and Emilio Zaratiegui from the BoE's Global Analysis Division. They noted this would "stand in stark contrast to typical stress scenarios, such as the 2008 global financial crisis," when a flight to safe-haven assets strengthened the US dollar.
A stronger dollar has historically supported the UK by boosting export competitiveness and raising the sterling value of dollar-denominated holdings. The surge in US tech stock valuations has already raised concerns that a sharp correction could have ripple effects that damage the British economy, even though no leading AI company is listed in London. On Thursday, US stocks traded near record highs, with momentum in the AI trade continuing to build.
Where the risks lie
In July, the BoE cautioned that US stock valuations had become increasingly stretched, with more AI companies taking on debt to finance massive investments. BoE Governor Andrew Bailey said last month that the economic impact of an AI bubble burst could prompt the central bank to respond with interest rate adjustments. Using an analysis of earnings announcements and share price movements for the "Magnificent Seven" tech stocks since 2000, BoE staff estimated that a 1% negative earnings shock would weaken the US dollar, while the pound, on an effective exchange rate basis, could appreciate by roughly 0.5% within a week.
The analysis also estimated that the FTSE 100 Index could fall by about 1% within two days. Nine days after such a shock, the yield on 10-year UK gilts could decline by approximately 6.5 basis points, while UK credit spreads could widen by about 10 basis points over two weeks. The report's authors concluded, "These shocks suggest that the impact originating from big tech companies would not be confined to big tech companies alone."
Comments