Analysis-Global markets were already fragile. Big AI bets could break them

Financial markets face increasing fragility due to ongoing conflicts, high sovereign debt, and trade tensions, with evidence of trouble appearing globally, such as the decline in Japanese and French bonds and weakening emerging-market currencies. The substantial spending on artificial intelligence (AI) by governments and companies, driven by the United States' relatively lenient regulations, has buoyed stock markets to record highs and spurred expectations of global economic growth around 3% this year. However, concerns are growing over the resilience of these markets.

The US election, international conflicts, and central bank policy decisions will exacerbate uncertainty throughout the year, according to some investors and economists. Persistent inflation, driven by US President Trump's trade policies and the Iran war's energy shock, has put pressure on central banks to raise interest rates, leading to record-high borrowing costs.

Former Goldman Sachs chief economist Jim O'Neill warns that if inflation does not subside, the risks stemming from the massive AI-related investment could grow.

Rising interest rates have already begun to expose vulnerabilities in the AI sector. In October, investors hastily moved out of AI stocks and into safe-haven bonds, resulting in a loss of over $2 trillion in market value from the tech-heavy Nasdaq 100. The cost of insuring bonds of some technology companies surged, and data center projects faced challenges in raising funds. Technology stocks from South Korea, China, and the US experienced significant declines.

Foreign markets have also shown signs of instability. French bond yields surged to levels seen during the 2012 euro zone debt crisis, leaving the government with limited scope to address growing civil unrest. Japan's economy, heavily reliant on energy imports, witnessed its bond yields reach 30-year highs, prompting authorities to consider raising rates more aggressively, which could undermine Tokyo's policy objectives and disrupt global capital flows.