The Need for Speed

Datacentres use up to 50 times more energy than a typical commercial office.

Datacentres are one of the most energy-intensive building types, consuming up to 50 times more energy than a typical commercial office.

While the UK government is investing billions into wind power generation, US big tech is going towards nuclear to power its energy-hungry AI datacentres. Clearly, large US technology companies do not feel renewables and batteries will be able to guarantee a supply of uninterrupted or cost-effective power.

In Alpha Bites ‘Scotty, I need more power’ we recently highlighted Microsoft’s deal with Constellation Energy to use its Three Mile Island nuclear plant to provide power for 20 years.

Microsoft has now been followed by fellow tech giants Amazon and Google who are also planning to use nuclear power. Amazon is to support the development of small modular reactors (SMRs) and has taken a stake in X-energy, an SMR developer.  Meanwhile, Google has agreed to buy power from SMRs to be built by a US start-up, Kairos Power.

Why is securing energy supply becoming so important?

An artificial intelligence (AI) generated query uses up to ten times the energy of a standard Google search. Investment bank Goldman Sachs estimates that energy demand from datacentres will grow by 160% by 2030. Together with electrification (EVs, etc.) and re-onshoring of manufacturing, US electricity demand could at least double in the next decade. In Europe, since 2008, electricity demand has declined by nearly 10%. The forecast growth in electrification of infrastructure and growth in AI datacentres could see energy demand grow by 50% by 2033. At a time when we are slowly transitioning away from fossil fuels to low-carbon sources of energy, this represents a major supply risk.

In the UK, the government’s recent International Investor Summit highlighted significant private investment in datacentres which begs the question, where is the power coming from? British engineer Rolls Royce is a leading player in SMRs but is awaiting the outcome of a delayed UK tender competition involving four bidders. Last month, the Czech Republic became the first country to place an order for a Rolls Royce SMR – ahead of the UK!

Sadly, tucked away in the budget was the news that the UK SMR tender decision is to be delayed again until Spring 2025. Rachel Reeves stated she wanted to ‘invest, invest, invest’ to drive economic growth, but it’s about investing wisely rather than just throwing money at something. The US tech giants are putting their money where their mouth is on SMR technology. Yet again, the UK has ground breaking, net-zero contributing technology but risks falling behind in the global development race due to government dithering.

 

What have we been watching?

 

As important as the UK Budget was, it is the US presidential election this week, which is of greater significance for global investors. This still looks like a very close call. The ‘Trump trade’ indicated a win at the start of the week, but this then reversed as Kamala Harris edged ahead in polling in the key Iowa swing state. Global bond yields have been edging up on concerns about post-election US government debt levels and the risk of there not being a clear election winner with all the uncertainty this would create. US bond yields also edged higher on a soft, albeit weather impacted payrolls report. The UK Budget borrowing guidance saw the UK 10-year gilt yield move up to 4.5%.   

UK equities drifted lower following the budget as interest rate sensitive sectors such as housebuilding and property were overshadowed by concerns that UK interest rates would not fall as quickly as hoped, while other sectors with high numbers of workers, such as retail, were impacted by the budget increase in national insurance and national living wage.

NATO formerly acknowledged for the first time that North Korean troops have been deployed to Russia and are operating in the Kursk border region, where Ukrainian troops have a foothold. The news comes as Russia continues to capture more territory in the Donetsk region due to its numerical superiority in artillery and ammunition.

Read our latest UK investment insights from Alpha PM

 

In the UK, Chancellor Rachel Reeves delivered her first budget, which revealed a £40bn increase in day-to-day spending (1.4% of GDP), funded almost entirely by a rise in taxation. The greatest burden will fall upon UK businesses with a double whammy of a 1.2% increase in Employer National Insurance (ENI) and a 6.7% increase in the National Living Wage. Let’s not forget that UK businesses are also being saddled with an extra £5bn burden from the government’s Employment Rights Bill reforms. The Chancellor expects the ENI increase will raise £25bn, however, the OBR warns this amount might only be £15bn if employers look to offset the cost through slower recruitment and wage growth. While the loosening of fiscal policy will stimulate economic growth in the first year or two, the OBR suggests growth will then slow due to the uncertainty about business investment given the increased tax burden. For example, firms reliant on low-paid employees could scale back their operations.

The Bank of England (BoE) may become more cautious following the Budget when lowering interest rates. The chances of a BoE interest rate cut of 0.25% later this week have fallen from almost 100% to 78%, while the chances of a similar cut in December have fallen to 50/50. The government has sought to shift to a more expansionary public sector expenditure envelope in the budget without spooking gilt or Sterling markets. However, while Sterling remained just under $1.30, government borrowing guidance and expected gilt issuance saw the 10-year gilt yield move up to 4.5% – in September it was 3.75%! Global credit rating agency Moody’s said ‘it leaves little flexibility to manage economic shocks without breaching the new fiscal rule.’

 

Eurozone economic growth in the third quarter was a bit better than expected at 0.4%, with slightly stronger growth from Germany, France and Spain offsetting a weaker Italy. Meanwhile, Eurozone inflation in October was a touch higher than expected at 2%. Services inflation was unchanged on the month at 3.9%, while core inflation was 2.7%.

 

US economic growth in the third quarter was a touch below expectations at 2.9%, but personal consumption was strong and ahead of forecast at 3.7%.

 

The Bank of Japan kept interest rates on hold due to ‘high uncertainties surrounding Japan’s economic activity and prices.’

Read our latest Chinese investment insights from Alpha PM

 

China’s manufacturing output expanded in October and for the first time since April. The PMI business activity indicator just scraped into expansion mode at 50.1. Economic momentum would be expected to improve moderately given the recent monetary and fiscal policy loosening, although Chinese investors are still awaiting official confirmation of a major fiscal stimulus plan. However, a tax crackdown by Chinese authorities threatens to deal a new blow to investor confidence. Wealthy individuals and companies must double-check their taxes for unpaid liabilities by carrying out ‘self-inspections.’

Read our latest investment insights from Alpha PM

 

Brent oil prices fell back to $73 even though eight members of OPEC+ said they would extend oil production cuts until the end of December.

 

Finally, a ‘cock-up with the comms’ according to a government official. Chancellor Rachel Reeves did not unveil new freeports in the budget, despite a government announcement the previous week saying she would. Instead of announcing five new freeports, Rachel Reeves outlined plans and funding for some existing designated freeport sites to become ’operational.’ These are Inverness and the Humber and three new customs sites in Liverpool. Government finances are once again holding back economic growth ambitions.

 

Read Last Week’s Alpha Bites – Shedding the Pounds

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