AI Trading Instability Amplifies Financial Market Volatility

For a long time, artificial intelligence remained the sole topic supporting investor optimism amid rising national debt and trade conflicts. Now this narrative is showing cracks: according to a Reuters report from London on November 3, global markets are under pressure from three factors, and AI trading is no longer shielded from them. Japanese and French bonds were sold off, and emerging market currencies fell.

What the numbers showed

In October, more than $2 trillion was wiped off the Nasdaq 100 over the month amid rising concerns about AI spending. Intel was hit hardest – its shares fell by 28.6% on October 30 following a report on significant AI expenses. The largest players are also feeling the pressure: three out of the four main hyperscalers – Amazon, Meta, and Alphabet – reported negative free cash flow in the last quarter, meaning they are spending more than they earn. Amazon's deficit alone amounted to nearly $35 billion.

AI and the bond market

In its October report, the IMF warned that the downturn in the AI theme could spread beyond stocks, posing a particular threat to countries with a limited set of fiscal tools. From 2024, the share of hyperscalers in the global issuance of investment bonds increased from less than 1% to 10%; the IMF also pointed to $300 billion in equity deals and $650 billion in debt among weaker AI companies. Yields on French bonds have reached levels seen during the eurozone crisis of 2012, and 10-year Treasuries are hovering around 5%. Countries with high debt burdens are poorly prepared for a new crisis.

What this means

The first problem is concentration: one theme accounts for a large part of market growth, and a disruption in it drags down the entire index. The second is how stress spreads: since hyperscalers have become a noticeable part of investment bond issuance, problems in AI no longer remain confined to stocks. Disappointment in returns could raise borrowing costs for tech giants and tighten conditions for weaker AI companies with $650 billion in debt. The third is timing: rising yields, 10-year Treasuries at 5%, and falling emerging market currencies leave little room for error.

It is worth monitoring the free cash flow and capital expenditure forecasts of hyperscalers, the pace of tech bond issuance, yields on Treasuries and French bonds, as well as emerging market currencies.