The markets face a “strong correction” if the mood deteriorates with respect to the AI ​​or the freedom of the Federal Reserve, says the Bank of England

By David Milliken and Phoebe Seers

London (Reuters) – World financial markets could collapse if the mood of investors deteriorates before the perspectives of artificial intelligence or independence of the United States Federal Reserve, the Bank of England warned Wednesday.

The Bank of England said that the valuations of the prices of the shares in the American stock markets were similar to those observed near the bubble of the Puntocom bubble in some measures and pointed out that the US government bonds were vulnerable to any weakening of the credibility of the Federal Reserve.

“The risk of strong market correction has increased,” said the Bank of England’s financial policy committee in a quarterly update, in its most acute warning to date on the dangers of a market drop caused by AI, adding that the risk of infection effects for the British financial system due to such shock was “material.”

The FPC is chaired by the governor of the Bank of England, Andrew Bailey, and focuses on the risks for financial stability. Bailey said last month to the British Parliament that he was “very worried” for the threats to the independence of the Federal Reserve.

The loss of independence of the Fed would cause a global shock

President Donald Trump has repeatedly urged the United States Central Bank to cut interest rates and has tried to fire one of its authorities, Lisa Cook.

“A sudden or significant change in the perceptions of the credibility of the Federal Reserve could result in a strong revaluation of US dollars, including the sovereign debt markets in the United States, with the potential of greater volatility, risk premiums and global infection effects,” said the Bank of England.

The indebtedness costs of the British government are closely correlated with the US treasure yields, and a fall in the prices of American bonds would probably raise the cost of the service of the new British public debt.

The yields of the bonds to thirty years reached last month their highest level since 1998 and the yields for shorter maturities – where most of the British indebtedness is concentrated – have also increased.

The Bank of England said that this increase reflected concerns about the difficulty of controlling the high indebtedness in advanced economies, amplified by political uncertainty in France and Japan.

The valuations of the echo of the peak of the end of dotcom

As for AI, the Bank of England said that 30% of the valuation of the US S&P 500 was composed of the five largest companies, the largest concentration in 50 years.

The Nvidia chips manufacturer, Microsoft, Apple, Alphabet, Google Matrix, Amazon and Meta, Facebook matrix, have strongly opted for AI.

The assessments of the shares based on past profits were the most exaggerated from the bubble of the Puntocom 25 years ago, although they seemed less based on the expectations of investors on future profits.

“This, when combined with a growing concentration within market rates, leaves markets particularly exposed if expectations on the impact of AI become less optimistic,” said the Bank of England.

Last month, Meta Chief, Mark Zuckerberg, said he would prefer to mischief a couple of hundreds of billions of dollars before the risk of being late for the AI ​​expansion.

In August, almost half of the fund administrators surveyed by Bank of America considered that possessing the seven largest technological actions in the United States was the most busy operation in the industry.

Despite these concerns, the S&P 500 reached a historical maximum on Tuesday, 14% more so far this year.

The domestic risks of the United Kingdom changed little

The Central Bank saw few changes in the risks for internal financial stability, since homes and companies continued to face a growing inflation – which according to prognosis reached 4% in September – already higher indebtedness costs compared to previous years.

The risk managers surveyed by the Bank of England had more confidence in the stability of the British financial system that six months ago and considered that the main dangers came from cyber attacks and geopolitical factors.

The England Bank left its main banking tools unchanged. He kept stable the anti -cyclical capital mattress (CCyB) in 2% and, after an annual review, left the minimum leverage ratio at 3.25%.

(Written by David Milliken edited by Gareth Jones)