AI Data Centre Investment May Slow Down Following US Election Results

The results of the US midterm elections could lead to a reduction in investments in Artificial Intelligence (AI) infrastructure and provide support to US Treasury bonds. According to a report by ICICI Bank, there is an increased risk of policy restrictions on 141 gigawatts (GW) of planned data centre capacity due to these election outcomes.

The report states that the Democratic Party has won the gubernatorial elections in the states of Texas, Georgia, and Ohio, which increases the likelihood of stricter scrutiny of data centre projects. Together, these three states account for approximately 33 per cent of the total operational and planned data centre capacity in the US.

During their election campaigns, the newly elected governors presented proposals to suspend or ban new projects. The primary reasons behind these proposals were concerns over excessive consumption of electricity and water, utility costs, and negative impacts on local communities.

Looking at the statistical details, these three states have a total data centre capacity of 156 GW. Of this, only 15 GW capacity is currently operational, while the remaining 141 GW is still under planning. Texas holds a 22 per cent share of the national capacity, while Georgia and Ohio hold 5 per cent and 6 per cent respectively.

However, ICICI Bank has cautioned that the election results do not necessarily mean that the proposed bans will definitely be implemented. Any policy changes will require legal and regulatory support. Nevertheless, this could lead to a potential decline in further investments in data centres, although it would not be appropriate to view it as a complete reversal of the AI investment cycle across the country.

This situation could prove positive for US Treasury markets. Stricter scrutiny of data centre projects will reduce capital expenditure in the AI sector, leading to a decrease in borrowing by large technology companies. A reduction in investment expenditure may lower pressure on economic growth and inflation, which could reduce the need for further interest rate hikes by the Federal Reserve.

Following the election results, the US two-year Treasury yield fell by 9 basis points to 4.54 per cent, later recovering to 4.59 per cent. Similarly, the 10-year yield fell by 7 basis points to 4.89 per cent and eventually stabilised at 4.91 per cent.

ICICI Bank has described these results as very positive for US Treasuries. The bank noted that this is likely to lead to a reduction in government borrowing and a decrease in deficit-increasing legislation. Furthermore, the Democratic Party's greater-than-expected victories may increase pressure on the administration to end the conflict in West Asia, which would further support Treasury markets.

Weakness was also observed in the Dollar Index following the election results. According to the bank, the value of the dollar declined due to expectations that AI regulations will become stricter and will impact economic growth.