AI Debt Crisis Threatens Global Markets as Tech Rout Slows

The tremors that rippled through Asian equity markets on Thursday offered a striking illustration of how fragile the financial architecture underpinning the artificial intelligence boom has become. South Korea’s KOSPI, a top-ten global index by market capitalisation, shed 20 per cent of its value in barely a week, while Japan’s Nikkei fell 5 per cent in a single session — losses that spoke not merely to sector-specific anxiety but to a deeper unease about the circular, debt-laden financing structures propping up the AI buildout.

By the time European and then American trading hours opened, however, the rout had lost much of its force. The Nasdaq edged 0.1 per cent higher, the S&P 500 gained 0.3 per cent, and the Dow Jones climbed 1 per cent to its highest level in a month — a resilience that was, under the circumstances, genuinely remarkable.

The epicentre of concern was CoreWeave, the AI cloud infrastructure company whose 2032 bonds, issued just four months ago, fell below 80 cents on the dollar — a threshold widely regarded as indicative of distressed debt. The cost of insuring against default by major US AI firms simultaneously surged to record highs, a signal that credit markets, which historically lead equity markets in pricing systemic risk, were registering something more serious than a routine correction. CoreWeave’s equity, paradoxically, rose 6.5 per cent on the day, illustrating the dissonance that can emerge when sentiment oscillates violently within a single session.

What makes the current juncture particularly consequential is the structural vulnerability it exposes. Capital expenditure across the AI sector has increasingly been financed not through retained earnings or straightforward equity issuance, but through debt, private credit and off-balance-sheet arrangements. When bond prices fall and credit spreads widen, the concern is not merely mark-to-market loss — it is the possibility of a self-reinforcing doom loop, where selling pressure in weaker credits casts doubt over healthier ones, triggering downgrades, forced divestment and a tightening of financing conditions precisely when cash has already been deployed.

That crisis point has not yet been reached. The rebound in US equities and the strong performance of Treasuries on Thursday both suggest that markets retain enough confidence to distinguish between volatility and systemic breakdown — for now.

The Treasury market’s behaviour deserves particular attention. US producer price inflation came in hotter than expected, following a similarly surprising consumer price reading the day before, and WTI crude spiked a further 3 per cent. Under normal conditions, that combination would pressure fixed income. Instead, the 10-year Treasury yield fell 10 basis points to 5.08 per cent, and longer maturities performed even better, making Thursday one of the strongest days of the year for US government bonds. Safe-haven demand, it turns out, has not been extinguished by weeks of heavy fixed income trading — it has merely been dormant. Guaranteed nominal yields above 5 per cent are evidently compelling enough to attract capital when equity uncertainty intensifies.

The rotation dynamic adds another layer of complexity to an already intricate picture. Chip stocks fell for a seventh consecutive session — their longest losing streak in four years — yet broader indices held firm, buoyed by gains in healthcare, which rose 2 per cent on the S&P 500, and by individual movers such as Nike, up 5 per cent. Deutsche Bank’s analysis of rotation patterns since mid-2024 provides useful context: the average duration of a rotation out of technology has been 67 days, with a median of 59 days, and tech drawdowns during these periods have averaged 16.6 per cent. If the current cycle follows historical precedent, the sector faces a sustained, if not catastrophic, period of underperformance relative to the broader market.

The US earnings season now assumes heightened significance. Expectations for technology companies remain elevated, and any failure to clear that bar risks accelerating the rotation already underway. The question hanging over markets is whether investors will treat AI-related weakness as a buying opportunity or as confirmation that the sector’s debt-fuelled expansion has outrun its fundamentals.

Elsewhere in currency and commodity markets, the dollar recorded its largest single-day decline in six weeks, with the Swiss franc gaining 1 per cent as investors sought traditional havens. Gold rose 1 per cent and silver 3 per cent, reinforcing the defensive character of Thursday’s session. The Brazilian real was the day’s biggest loser among major currencies, falling 1.5 per cent.

The day ahead brings speeches from Federal Reserve Chair Kevin Warsh, ECB President Christine Lagarde and Bank of England Governor Andrew Bailey, alongside IMF and World Bank meetings in Bangkok. Their collective tone — on inflation persistence, monetary policy trajectory and financial stability — will likely set the parameters within which the AI credit story continues to unfold. Markets that absorbed Thursday’s turbulence with surprising composure may find that composure tested again before the week is out.