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

Global financial markets are currently under strain due to a variety of factors, including ongoing conflicts, burgeoning sovereign debt, and escalating trade tensions. These issues have manifested in various ways around the world, such as a sharp decline in Japanese and French bonds, as well as a plunge in currencies of emerging market nations. However, the sector that once provided investors with a semblance of confidence is now facing its own set of challenges.

The surge in investment in artificial intelligence, driven by the relatively lenient regulatory environment in the United States, has led to unprecedented levels of spending, surpassing the $trillion mark. This influx of capital has pushed stock markets to unprecedented heights and has fueled expectations of robust global economic growth, projected at a healthy 3% this year. Nevertheless, the very optimism that has been generated by AI's meteoric rise has started to show signs of waning.

The growing unease stems from concerns over the resilience of these markets. The erratic trade policies of U.S. President Donald Trump, coupled with the geopolitical tensions stemming from the Iran war, have reignited global inflation. This inflationary pressure has compelled central banks to consider raising interest rates, a move that adds to the already high borrowing costs experienced by governments worldwide.

The combination of AI's rapid investment growth and the mounting debt levels of governments has resulted in borrowing costs reaching unprecedented levels, not seen in decades.