The Bank of England warns of a global market crash with "two major risk points": US stock AI valuations comparable to the internet bubble, and threats to the independence of the Federal Reserve

According to the Zhitong Finance APP, the Bank of England warned on Wednesday that if investors become pessimistic about the prospects of artificial intelligence or the independence of the Federal Reserve, global financial markets could experience a sharp decline. The Bank of England stated that the valuation of the U.S. stock market is close to the valuation levels seen at the peak of the internet bubble according to certain indicators, and pointed out that U.S. Treasury bonds are vulnerable to a decline in the credibility of the Federal Reserve.

The Financial Policy Committee of the Bank of England stated in its quarterly report: "The risk of a significant market correction has increased." This is the strongest warning the committee has issued so far regarding the dangers posed by a market crash triggered by artificial intelligence, adding that such shocks could have "considerable spillover effects" on the UK financial system.

The Financial Policy Committee is chaired by Bank of England Governor Andrew Bailey, focusing on risks to financial stability. Last month, Bailey expressed "great concern" to the UK Parliament about the threat to the independence of the Federal Reserve.

Loss of Federal Reserve Independence Could Trigger Global Turmoil

President Trump has repeatedly urged the Federal Reserve to significantly lower interest rates and attempted to fire one of its governors, Lisa Cook.

The Bank of England stated: "If perceptions of the Federal Reserve's credibility suddenly change significantly, it could lead to a substantial adjustment in the prices of dollar assets (including assets in the U.S. sovereign debt market), potentially triggering higher volatility, risk premiums, and global ripple effects."

The UK government's borrowing costs are closely related to U.S. Treasury yields, and a decline in U.S. bond prices is likely to increase the debt servicing costs of newly issued UK public debt. Last month, the yield on UK 30-year government bonds reached its highest level since 1998, while yields on shorter-term bonds (which correspond to most of the UK's borrowing) also rose.

The Bank of England stated that this interest rate hike reflects concerns about the difficulty of controlling high borrowing levels in developed economies, a concern that has been exacerbated by political uncertainties in France and Japan.

Artificial Intelligence Valuations Reaching Levels Seen During Internet Bubble Peak

Regarding artificial intelligence, the Bank of England noted that 30% of the valuation of the S&P 500 index is contributed by the top five companies, the highest proportion in 50 years.

The price-to-earnings valuations based on past earnings are at their highest level since the internet bubble 25 years ago; however, from the perspective of investors' expectations for future profits, this valuation does not seem as high.

The Bank of England stated: "Moreover, with the increasing concentration of funds within market indices, if expectations regarding the impact of artificial intelligence are no longer so optimistic, the market will face particularly large risks."

Last month, Meta (META.US) CEO Mark Zuckerberg stated that he would rather waste hundreds of billions of dollars than suffer losses from failing to advance artificial intelligence development in a timely manner.

In August, nearly half of the fund managers surveyed by Bank of America believed that holding the seven major U.S. tech stocks was the hottest investment choice in the industry. Despite these concerns, the S&P 500 index still reached a record high on Tuesday, having risen 14% so far this year Changes in Domestic Risks in the UK Remain Minimal

The Bank of England believes that the risks to domestic financial stability have not changed significantly, as households and businesses continue to cope with rising inflation (which it predicts will reach 4% in September) and increased borrowing costs compared to previous years.

Risk managers surveyed by the Bank of England are more confident in the stability of the UK financial system than they were six months ago, and they believe that the main threats come from cyberattacks and geopolitical factors.

The Bank of England has kept its main regulatory measures for banks unchanged. It has maintained the countercyclical capital buffer (CCyB) at 2% and kept the minimum leverage ratio at 3.25% following its annual review