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BoE Flags Global Market Dangers
The Bank of England is warning of a potential downturn in global stock markets, saying current prices do not reflect significant worldwide economic risks. Deputy Governor for financial stability Sarah Breeden expressed concern over investor complacency as risks grow.
"There's a lot of risk out there, and yet asset prices are at all-time highs. We expect there will be an adjustment at some point," Breeden stated, according to the BBC. She did not predict the timing or scale of a correction but highlighted the danger of multiple risks happening simultaneously.
"What keeps me up at night is the possibility of a number of risks hitting at once – a big economic shock, a loss of confidence in private credit, and a fall in AI and other high valuations. What happens then, and are we ready?" she asked.
AI Frenzy and Credit Market Risks
Global stocks, especially in the U.S., have hit record highs recently. This rally continues even with warnings from the International Energy Agency about a major energy shock. Strong investment in artificial intelligence has been a main driver of U.S. market gains, with tech companies investing heavily in AI infrastructure. Microsoft founder Bill Gates has compared the current AI rush to the dotcom bubble of the late 1990s, a period known for inflated values that later crashed. However, figures like Nvidia CEO Jensen Huang have dismissed bubble concerns.
Breeden also pointed to risks in the fast-growing "shadow banking" sector, particularly private credit funds. These firms lend to companies outside regular banking, and some have recently faced losses and blocked withdrawals. "Private credit has gone from nothing to two-and-a-half trillion dollars in the last 15 to 20 years. It hasn't been tested at this scale with the degree of complexity and interconnections it has with the rest of the financial system so far," she noted.
Ensuring Financial System Strength
While the UK's FTSE 100 index trades near its all-time high, it doesn't feature the major AI companies driving U.S. market performance. Breeden stressed that the Bank of England's main goal is not to predict market drops but to ensure the financial system is strong enough to handle them if they happen.