The tumble in AI affect forex markets around the weekend exposed some latent weaknesses in global financial markets which had been papered over by, well, greed. CNN’s fear and greed index, which tracks risk appetite in the markets, fell to the lowest level it has been in months. Another indicator of market distress is the volatility index, VIX. The higher the rating the more volatility, and it hit the highest it has been since the pandemic-induced crash.
Clearly, a lot of investors are nervous. About what? Well, there is a lot to be concerned about. One of the things that had investors pumped, but analysts worried as the AI-induced market push through the first part of the year. Indices hit new record highs 37 times in six months – but all thanks to a handful of very large companies all concentrated in one sector. And that sector is showing its vulnerabilities.
The AI Bubble Wobbles
Several big tech companies have seen their share price rise in triple digits in less than half a year, such as Nvida, Meta, etc. All of that has been thanks to expectations that Artificial Intelligence will drive further growth. But, it might be that investors have gotten a little ahead of themselves.
Somewhat unnoticed in all the chaos of the markets turning deep red were relatively quiet reports that investors are concerned that AI isn’t making any money. Google parent Alphabet (which reported right before the markets took a dive) is a standout example. The company has seriously ramped up capital expenditure to build out its artificial intelligence capabilities out of fear that rival Microsoft can take its market share.
It’s Not Paying Off
Despite an 85% increase in spending this year to $49 billion, Google isn’t seeing a surge in revenue. A similar story comes from Meta, which is also dumping billions into the tech, but still sees its income primarily from ad spending. Now, to be fair, it might take some time for these companies to see a return on their investment, as it’s been less than two years since ChatGPT crashed on the scene.
Some companies are making a lot of money, though. Those are the companies supplying the infrastructure for AI, like Nvidia selling AI chips, and Super Micro Computer selling server components and Dell selling servers. But companies offering AI to consumers aren’t seeing a major uptick in sales. And that poses a big problem.
How Does AI Affect Forex?
AI has been all the rage among investors, soaking up lots of the free capital for trading and investing. If the market is starting to bring its expectations back down to reality, that means the stock market could be in for a serious correction as most of the gains over the last year would be mitigated. It might go so far as to tip over into a recession, but even if it doesn’t go that far, it could spill over into the currency markets.
If stock markets tip over, then traders are going to be running for safety, and expecting radical cuts in interest rates. This would likely be a boon for gold, and the yen. The BOJ can’t cut anywhere near as much as other central banks in the event of an economic slowdown, meaning that the yen can quickly go from a weakening currency from carry trade to a safe-haven bet. Particularly if investors increase their expectations that the Fed will cut rates if stock markets keep going down.
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