The Bank of England has cautioned that financial markets could face a sharp correction with potential spillover effects on the broader economy.
In its quarterly Financial Stability Report, published Wednesday, the central bank highlighted stretched valuations in equity markets—especially among technology firms benefiting from the artificial intelligence boom.
- Equity valuations appear elevated on several measures, particularly for AI-focused technology stocks, the report noted.
- It warned that growing concentration within major indices has amplified vulnerability, leaving markets “exposed should optimism over AI-driven growth fade.”
The BoE also cited several broader risks, including rising government borrowing, concerns over the independence of the U.S. Federal Reserve, and heightened geopolitical tensions. “Uncertainty surrounding the global risk environment raises the possibility that markets have underpriced adverse outcomes,” the report said, warning that a “sudden correction” could occur if any of these risks materialise.
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US equity markets didn't pay this any attention, but if they ever do, some implications to watch out for:
Equities: Could weigh on sentiment toward global tech stocks and trigger profit-taking in AI-linked shares.
FX: Heightened risk aversion may support safe havens such as the yen, Swiss franc, and US dollar.
Rates: Concern over financial stability could bolster expectations for easier policy or bond buying if volatility spikes.
