Global Markets React to AI Sentiment Shift and Political Risks

This is a roundup of global market developments and commentary by Jamie McGeever. Wall Street recovered some ground on Monday as investors bought technology stocks after recent losses and anticipated key earnings reports. Easing worries about AI reduced last week's safe-haven demand for bonds and pushed yields higher. The SOX semiconductor index rose 2.5% on Monday, ending an eight-day losing streak, the longest since October 2008. The index had fallen 11.5% last week. South Korea's KOSPI rebounded 4% over the last two trading sessions. However, the KOSPI remained around 20% below the level of two weeks ago.

McGeever argues that AI plays a pivotal role in exacerbating global imbalances and driving global capital flows. McGeever warns that these increasingly connected developments could reverse in a disorderly way if investor sentiment toward AI deteriorates. McGeever sees signs that sentiment may already be deteriorating. McGeever describes AI sentiment as increasingly polarized despite widespread recognition of the technology's transformative significance. Upcoming US earnings and company outlooks will test whether still-high stock prices are justified.

Unrest and riots in France weighed heavily on French bond prices and pushed the euro lower. McGeever argues that polarized politics and approaching elections in France, Brazil and the US are increasingly important investment risks. McGeever argues that spreading riots are unlikely to make France's fiscal challenges easier to address. Brazil holds a closely contested presidential runoff election on Sunday. US midterm elections, barely two weeks away, could leave President Donald Trump's Republican Party without control of either house of Congress.

McGeever identifies affordability, inflation, high energy prices and AI-related job-security concerns as dominant issues in national debates across countries. Policymakers at last week's IMF and World Bank meetings in Bangkok called for fiscal discipline, vigilance over AI and action on global trade imbalances. McGeever argues that fractured domestic politics and the weakest spirit of multilateralism in decades make those goals difficult to achieve.

Official figures released on Monday showed that China's economy grew 4.5% in the third quarter, faster than economists expected. Strong exports drove the growth and put China on course to exceed last year's record $1.2 trillion trade surplus. McGeever identifies China's expanding surplus as a key contributor to growing global imbalances that the IMF and others have warned about. McGeever suggests that a stronger yuan may help reduce China's reliance on exports and support domestic demand.

The yuan has appreciated steadily over the last 18 months and reached a four-year high against the dollar. However, the yuan's broader real effective exchange rate remains relatively weak. The real effective exchange rate has risen 7% since May last year. However, the real effective exchange rate remains around 15% weaker than four years ago. The real effective exchange rate is currently at the average of the past 20 years.