A hidden risk is impacting markets more than the alleged AI bubble. An invisible dynamic rooted in the financial system is rewriting the rules of the game.
The most common belief is that the market is falling because of fears of the AI bubble. It’s a convenient, immediate, almost reassuring interpretation: if the risk is concentrated in American giants like NVDA, simply avoid them or reduce exposure. And, even better, many feel comfortable holding a BTP or any form of government bond, convinced that the storm won’t hit them.
The reality, however, is quite different. The risk that is leading investors to reevaluate their positions has nothing to do with the alleged AI bubble. It is linked to much deeper, more subtle, and in some ways disturbing dynamics, closely reminiscent of what happened in 2008. And we all know how that ended. It’s definitely worth looking into.
It’s not the AI bubble that’s shaking the markets
The AI bubble? If that were truly the problem, markets would have reacted completely differently to the latest corporate data. NVIDIA, the global epicenter of artificial intelligence, beat both earnings and revenue expectations, reporting year-over-year EPS growth above 60%. This is not typical behavior for a sector in collapse or on the verge of a speculative blow-up.
The reality is that the market isn’t afraid of AI. Or at least not today. Investors are worried about something else. Something directly affecting the stability of the financial system — even the “safest” segments, such as fixed-income markets.
And here we begin to get to the heart of the matter.
The real breaking point: the money market
The risk truly challenging the structure of financial markets lies not in technology, but in the money markets. It’s a complex, technical, and rarely discussed risk, yet one capable of affecting any asset class: from European equities to sovereign bonds, all the way to the S&P 500.
A first clear sign comes from the Federal Reserve.
The Fed does not appear willing to cut rates, despite recurring talk about “labor market turbulence.” The reason is straightforward: inflation remains stuck above 3%, still far from the 2% target. Such persistent inflation is forcing the central bank to maintain a restrictive stance for longer than expected, with direct consequences for credit conditions and overall market liquidity.
This is the visible, widely recognized concern. But there’s a second, far less obvious dynamic that is becoming crucial.
The silent decline in reserves: the real source of stress
In recent months, system liquidity has contracted significantly, generating friction precisely where the financial system is most sensitive: the overnight funding market.
Bank reserve balances at the Federal Reserve have fallen below $3 trillion. Is this a critical threshold? Potentially.
Why? Because once reserves fall below certain levels, banks begin to compete for liquidity. And when banks compete for reserves, the system loses elasticity. It’s like stiffening the support beams of a skyscraper in the middle of a storm.
The problem worsened when the U.S. Treasury increased T-Bill issuance and expanded its Treasury General Account (TGA). This liquidity drain further reduces available reserves, triggering two direct consequences:
- Overnight funding rates rise
- Risk assets are sold to raise liquidity
The result? Pressure across all risk assets, regardless of sector. This is why it’s not just AI or tech stocks that are falling. This is why even “defensive” sectors or markets geographically distant from the U.S. are moving in unison.
Why is this dynamic a problem?
The reason is both simple and complex. The money market is the core funding mechanism of the financial system. When overnight liquidity becomes more expensive, everything becomes more expensive: asset purchases, leverage, position rollovers, and market-making activities.
When the system tightens, volatility increases. This creates a kind of undeclared mini-crunch — subtle, invisible, but impactful. A tightening that does not yet affect the real economy, but instead the market’s microstructure. And when the structure creaks, global investors can’t ignore it.
And this is where the déjà vu arises.
This is not 2008, of course. But the pattern — low liquidity, shrinking reserves, funding stress — is unmistakably familiar. This is why markets are falling, and why they are doing so in a synchronized manner.
It’s not a collapse, it’s an imbalance
What we are experiencing is not a collapse of the financial system.
It is an imbalance — internal friction, background noise that weighs heavily on an already fragile moment. The market perceives it, interprets it, and prices it in.
The message is not to spread panic. It’s to take note.
When liquidity tightens, every asset class becomes more vulnerable.
Original article published on Money.it Italy 2025-11-26 06:52:00. Original title: Non solo bolla AI. Ecco il vero rischio nascosto che sta facendo scendere i mercati
