The past week offered a useful preview of what an AI bubble bursting in markets might look like. According to the Financial Times, the trigger was not hard economics or a technical glitch but vibes. Investors already know the risks: a highly concentrated global stock market propelled by excitement over one big theme, heavy borrowing that is often hidden from rating agencies and investors, and doubts about whether the technology can generate enough revenue to cover its costs.
Central banks and bodies such as the IMF and the Bank for International Settlements have repeatedly warned that the boom cannot last forever and that systemic shocks must be prepared for. Surveys of professional investors now rank AI exuberance and the hyperscaler debt binge at the top of their worry lists. Nothing fundamental had changed in the second half of the week, yet markets wobbled sharply. South Korea's chip-heavy stock market fell 8 per cent in a single day, and bonds issued by pure-play data centre companies took a beating. Credit default swaps on some issuers rose sharply.
The week also offered a glimpse of how a true AI shock might play out. Boring, non-tech stocks in the UK's FTSE 100 outperformed, and US government bonds rallied as investors sought safe assets. Despite sticky US inflation, benchmark 10-year yields fell back toward 5 per cent. The dollar also weakened, with the DXY index down almost 1 per cent since midweek, suggesting a possible retreat from US assets.
The difficulty is timing. Traders cannot point to a single event that unsettled markets, but several warning signs have emerged, including a warning from Broadcom's chief executive about how chip investors are treating markets.
Source: Financial Times Markets · Summarized by HeadlinesBriefing