Sawt Falasteen - ECB warns on stretched AI valuations and sovereign debt risks

"Financial markets, notably equity markets, remain vulnerable to sharp adjustments due to persistently high valuations," the ECB said in its regular review of the single currency area's financial stability.

"Market sentiment could shift abruptly, not only if growth prospects deteriorate but also if technology sector earnings -- especially those of companies associated with artificial intelligence -- fail to deliver on expectations."

US equity markets have surged to successive record highs, recovering from a sharp sell-off in April after US President Donald Trump unveiled harsh new tariffs that were then partially rowed back.

But the gains have been mostly concentrated among technology companies such as AI-chip designer Nvidia, prompting fears of a hype-fuelled bubble that could pop.

Speaking on a call with reporters, ECB Vice President Luis de Guindos said there was a risk of an "accident" even though healthier company fundamentals meant the current situation was not directly comparable with the dotcom bubble of the 1990s.

"Valuations are very high according to historical standards," he said. "The possibility of an accident is going to be there."

High levels of government debt could further undermine financial stability, the ECB said, warning that this could result in swings in the value of the euro and the cost of eurozone government debt.

Market concerns around "stretched public finances could... create strains in global bond markets," the ECB said.

"At the same time, fiscal fundamentals in some euro area countries have been persistently weak. Fiscal slippage could test investor confidence."

Y.Zaher--SF-PST