TheChek News Flow

Acting secretary of defense’s move marks change of heart after he had initially ordered carrier home to Washington state

WASHINGTON—The Pentagon’s acting chief abruptly reversed course, sending an aircraft carrier to the Middle East to counter threats posed by Iran, days after directing it to leave the region over the advice of top military advisers.

Acting Secretary of Defense Chris Miller said in a statement Sunday evening that he had directed the USS Nimitz to the Middle East, three days after ordering that it be sent home.

The move was a remarkable change of heart for Mr. Miller, who had previously ordered the carrier be sent home against advice by top commanders that the carrier needed to remain near the Middle East because it represented an important show of force at a time when the threat posed by Iran was high, officials said.

“Due to the recent threats issued by Iranian leaders against President Trump and other U.S. government officials, I have ordered the USS Nimitz to halt its routine redeployment,” the statement said. “The USS Nimitz will now remain on station in the U.S. Central Command area of operations. No one should doubt the resolve of the United States of America.”

The statement didn’t say how long the carrier would remain in the region.

Fears are rising that Tehran or its proxies may retaliate around the first anniversary of the killing of Maj. Gen. Qassem Soleimani, the head of Iran’s powerful Islamic Revolutionary Guard Corps, and Iraqi paramilitary commander Abu Mahdi al-Mohandes. They were hit by a U.S. drone strike while traveling on Baghdad’s airport road on Jan. 3, 2019.

Late last week, Mr. Miller, who was appointed acting secretary after the firing of Defense Secretary Mark Esper in November, directed that the carrier redeploy to its home port in Washington state. The ship’s crew was quarantined for two weeks because of the coronavirus pandemic and then deployed for nearly 10 months, an unusually long period, and Mr. Miller believed returning the ship home was necessary for its maintenance and the well-being of the ship’s crew, officials said.

“We are glad that we can conclude 2020 by announcing these warriors are headed home,” the Pentagon said in a statement Thursday about the carrier and its accompanying ships.

Other officials also believe Mr. Miller was convinced that drawing the carrier out of the region would signal U.S. interest in de-escalating tensions with Iran. The carrier is considered one of the most potent symbols of American military might, and its presence can send a message emphasizing U.S. military capabilities.

Military advisers, including the chairman of the Joint Chiefs of Staff, Army Gen. Mark Milley, and Marine Gen. Frank McKenzie, who heads U.S. Central Command, which is responsible for U.S. military operations in the Middle East and Central Asia, had urged Mr. Miller to keep the carrier in the region, defense officials said.

But after the Defense Department said that the carrier was going to depart the region, U.S. officials became aware of many public statements from Iranian officials that they considered concerning, officials said. On Twitter, Iran Foreign Minister Javad Zarif repeatedly warned of plots to provoke conflict between the two nations.

“Intelligence from Iraq indicate plot to FABRICATE pretext for war,” Mr. Zarif wrote in a tweet Friday. “Iran doesn’t seek war but will OPENLY & DIRECTLY defend its people, security & vital interests.”

Iraqi officials have scrambled to prevent retaliatory attacks by militias, warning that it could lead to an aggressive U.S. military response.

The U.S. Central Command and the Joint Chiefs of Staff at the Pentagon didn’t respond to queries on Sunday.

In recent weeks, the U.S. has seen increased chatter among some militia groups in Iraq threatening to retaliate for the deaths of Gen. Suleimani and Mr. al-Mohandes, the official said.

There has been an escalating U.S. presence in the region. On Wednesday, the U.S. dispatched two B-52 bombers on a flight over the Middle East in a show of force directed at “anyone who intends to do harm to Americans or American interests,” according to the U.S. Central Command. In addition, an amphibious assault ship, the USS Makin Island, with a squadron of F-35s, is currently near the Persian Gulf.

Largest, China Mobile, on course for lowest close since June 2006

Shares in China’s three large telecom carriers fell Monday, after the New York Stock Exchange said it would delist them to comply with a U.S. government ban.

In Monday-morning trading in Hong Kong, shares in the largest, China Mobile Ltd. CHL 0.88% , fell as much 4.5%, putting the stock on course for its lowest close since June 2006. Shares in smaller competitor China Telecom Corp. CHA -0.04% lost as much as 5.6%, while China Unicom CHU -1.56% retreated 3.8%.

The NYSE said Friday that it would suspend trading in securities issued by the three companies by Jan. 11, while halting trading in closed-end funds and exchange-traded products that hold banned stocks.

An executive order signed by President Trump in November will block on Jan. 11 Americans from investing in companies the U.S. government says help the Chinese military. It is a fresh setback for U.S. investors in Chinese telecom companies. These groups rank among the largest global telecommunications providers but have largely lagged behind the broader markets since the companies began listing in the U.S. more than two decades ago.

The three Chinese companies said holders of their American depositary receipts can swap those securities for their Hong Kong-listed ordinary shares through Bank of New York Mellon, which is the depositary for all three ADR programs.

The trio said they regretted the U.S. move but stressed the limited importance of their depositary receipts. These securities represent ownership of 3.3% to 8% of the companies’ tradable shares, and account for 9% to 22% of total trading volumes, when both ADRs and Hong Kong shares are considered, they said in separate statements.

Likewise, the China Securities Regulatory Commission said Sunday that the combined market value of the ADRs was less than the equivalent of about $3.1 billion and that the companies would be able to cope with the adverse effects of the ban and the delisting.

Still, the financial-market regulator attacked the ban, saying it was introduced for “political purposes, completely ignoring the actual situation of the companies concerned and the legitimate rights and interests of global investors, and seriously disrupting the normal market rules and order.”

In a note Sunday, Citigroup analyst Michelle Fang said the Hong Kong shares would come under pressure as shareholders liquidated ADRs to convert into Hong Kong stock. She said the potential removal of the shares from stock indexes could also cause further selling.

While the U.S. government has blacklisted the telecom carriers’ unlisted parent companies, it hasn’t added the publicly traded businesses to its list. Index providers have moved to exclude some companies directly named by U.S. authorities but haven’t said they would drop stocks in listed subsidiaries of blacklisted firms.

Ana Botín: Banking regulation needs a reset

Rules should be amended to remove Big Tech’s advantages and promote green finance

As the new year begins, and we try to rebuild our economies, we need to rethink the way we regulate finance. That is because the challenges posed by the Covid-19 pandemic are different from those caused by the 2008 financial crisis.

Back then, authorities drew two conclusions from the fact that banks were a big part of the problem. To reduce the risk to financial stability, banks needed to be much better capitalised, and to reduce economies’ dependence on large banks, competition from new entrants — including tech companies — should be encouraged.

These objectives have largely been met. Today, banks are indeed much better capitalised and balance sheets are healthier. Big Tech and other new providers have been making large inroads into financial services. Now the regulatory regime needs another reset to address three critical challenges.

The first is clearly the recovery, which would be accelerated if banks lent more to business. That means they need to be able to deploy more of the capital they have built up. And if they want to build up more capital to deploy, they need to be able to attract investors.

At the moment, however, most banks cannot deploy their balance sheets to their full potential. This is largely due to the way investors see capital regulation — including the capital “buffers” that banks have been required to build up since the financial crisis. The aim was simple: banks would increase their capital and build cushions during good times that could be drawn down to absorb losses in bad times. During the coronavirus crisis, regulators have allowed banks to use these buffers. But investors worry about what will happen once the economy starts to recover and banks are required to rebuild their buffers. This will take time, as low interest rates and weak economies will depress banks’ profits. This concern puts pressure on bankers to increase capital now, rather than using it to fund the recovery.

Regulators, including Randy Quarles who chairs the global Financial Stability Board, are talking openly about this problem. They cannot address it soon enough. In the near-term, authorities should stabilise capital requirements; eliminate uncertainty about the Basel III regulatory framework adopted after the financial crisis; and simplify and calibrate the way banks can calculate loss-absorbing capital and liquidity.

A longer-term rethink should look at how best to use capital buffers and the optimal level of capital requirements — and re-examine the way banks calculate the risk weightings on their assets, with an eye to freeing up capital to back new lending.

The second challenge is to reset the financial regulatory regime so it supports and hastens the green transition. Global action is required to agree on a “green” taxonomy, and make sure all large, listed companies comply with the recommendations of the Task Force for Climate Related Financial Disclosures. Markets need new incentives to support the transition to a low-carbon economy: regulators should consider how to reduce the cost of capital for banks that finance green activities.

The third challenge is the digital revolution. Regulation now favours tech companies that intermediate financial services over banks. This is especially true for the rules on data, which powers payments. Large tech companies are becoming lending platforms without having to comply with most banking regulation. Their role, although still relatively small overall, is growing. Last year, fintech and Big Tech credit reached $795bn globally, according to the Bank for International Settlements. The pandemic will only entrench the digital players.

We need to level the playing field — not to give banks an advantage, but to remove the advantage that tech companies have had for the last 10 years. Under EU regulations, financial firms must give tech companies access to customer-generated data if the customer agrees. This requirement should apply to data held by every sector, including tech companies. The playing field should not be tilted in favour of anyone. New proposals from the European Commission require urgent action. 

I am not saying we need to tear up all the regulation that was put in place after 2008. But rules should evolve as the world, the competition and risks change. Let’s stop regulating through the rear mirror. Politicians, regulators and banks need to find a way to make our regulatory structure serve individual customers and businesses better while helping lenders deliver results to their shareholders and address these three challenges. A reset is required.

Groups estimate space may be slashed by as much as 50% because of shift to remote working

Leading international law firms are ditching trophy office moves as they look to slash space by as much as 50 per cent because of the shift to remote working as a result of the pandemic.

Global firm Norton Rose Fulbright, listed DWF and London-based Fieldfisher project a reduction in floorspace of between 30 per cent and 50 per cent with workers planning to work more regularly from home. 

It comes just one year after a clutch of groups signed long-term deals on expensive trophy offices designed to lure graduates and impress high-end clients, which have cost them millions of pounds.

Law firm moves in London rank consistently as some of the largest and most valuable deals, according to property agent Cushman & Wakefield.

But after the global pandemic, firms are embracing a permanent shift to homeworking as they seek to downsize, modernise or sublet space.

The economic uncertainty and pressure on costs have also led those firms that have not already committed to moves to extend leases at their present bases or scrap relocations to expensive premises.

In December, top UK law firm Slaughter and May renewed its lease at One Bunhill Row in the City of London for 10 years, ending its hunt for a new London location.

Paul Stacey, Slaughter and May executive partner, said the firm had “completed an extensive search of potential properties across Central London” but decided the building was “an important part of our identity”.

California-based Cooley also extended its lease at its Moorgate office after the pandemic led to delays to its planned move to 22 Bishopsgate this year, according to an executive at the firm.

New York moves have also been put on hold. Elite “magic circle” firm Allen & Overy extended its lease for five years at the Sixth Avenue skyscraper it shares with peers Mayer Brown and White & Case.

It was in the process of moving to 45 Rockefeller Plaza on Fifth Avenue when the pandemic hit, but now wants more time to evaluate the situation, said a partner at the firm.

Yet, 2020 was expected to be the busiest since 2015 for law firm office moves, said tenant advisers DeVono Cresa, with at least 15 firms in London poised to take up new space they may no longer need and at a big cost.

International firm Freshfields Bruckhaus Deringer set aside almost £2m for capital expenditure related to its move to City skyscraper 100 Bishopsgate. The 250,000 square feet of space is expected to cost the firm about £16.5m a year. 

Linklaters also revealed its move to a new tower at 20 Ropemaker Street in the City of London will cost between £308m and £445m on lease payments over a 20-year period. This is for 300,000 sq ft of space,

However, long leases make near-term moves impossible for many law firms. In several cases, they hope to sublet floorspace instead.

DWF projected cost savings of £600,000 in its half-year results in December partly through plans to cut floorspace by as much as half in many locations. 

Matt Doughty, chief operating officer, told the Financial Times: “Survey results are suggesting people want to work at home three days a week . . . You’ve got to find third parties who will take on space from you. There are always businesses bigger than you, so always opportunities.” 

“Most firms are looking really closely at their footprint,” said Chris Lewis, a director at DeVono Cresa. “You have got to feel exposed if you’ve got a lot of empty space, especially as a law firm and [the cost] is coming out of partners’ pockets.”

Typical lease lengths for commercial tenants in London are 15 to 20 years, and there are few businesses clamouring for space if law firms try to sublet, said Mr Lewis.

But he said landlords would listen to tenants who wanted to extend their leases in exchange for downsizing. “Every owner of a building would want to have certainty and longevity — even over just 70 per cent of the space — rather than have 100 per cent come back in a couple of years.”

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Google sister company raised $3.2bn last year but John Krafcik says challenge remains huge

Last year was the most significant yet in Waymo’s 11-year effort to develop a driverless car.

The Google sister company raised $3.2bn, signed new deals with several partners and launched the world’s first truly driverless taxi service in Phoenix, Arizona.

Even so, the widespread rollout of fully autonomous vehicles remains slow, staggered and costly.

“It’s an extraordinary grind,” said John Krafcik, Waymo chief executive, in an interview with the Financial Times. “I would say it’s a bigger challenge than launching a rocket and putting it in orbit around the Earth . . . because it has to be done safely over and over and over again.”

Gone is the optimism of just a couple of years ago. In March 2018, Waymo confidently forecast that “up to 20,000” electric Jaguars “will be built in the first two years of production and be available for riders of Waymo’s driverless service, serving a potential 1m trips per day.”

Two months later, it added that “up to 62,000” Chrysler minivans would join its driverless fleet, “starting in late 2018”. 

Today, there is little sign that any of these vehicles have been ordered and Waymo’s official fleet size remains just 600.

Mr Krafcik, a carmaking expert who coined the term “lean production” in the 1980s and rose to be chief executive of Hyundai America, acknowledged that he and his colleagues had relied on their experience in the car industry to judge how fast Waymo’s growth would be.

“When we thought, in 2015, that we would have a broadly available service by 2020, it wasn’t a crazy thought,” he said. The thinking was: “Well, if we’ve got one prototype, then we can get to mass production in just a couple of years, right?

“This was a position of — I wouldn’t say ignorance — but a lack of information and a lack of experience . . . We’ve become very humble over these last five years.”

Waymo, which started as a Google project in 2009, first demonstrated its driverless technology publicly in 2015, spawning a whole new industry that generated all kinds of hype.

Uber began spending $20m a month to try to build its own driverless cars, fearing the collapse of its business model. Its goal was to have 100,000 self-driving cars on the road by 2020.

“This war for self-driving is truly existential for Uber,” its chief product officer warned then chief executive Travis Kalanick in May 2016. “Either we’ll start up our second S curve of growth or we’ll die.” 

But it took Waymo two more years to operate three fully driverless cars at the same time, then another year to have 100. One more year of testing gave Waymo the comfort to begin ferrying select passengers in its test vehicles in Phoenix. Then, three months ago, it opened the network to the public.

This markedly slower timeline is unlikely to be bested, said Mr Krafcik. Turning again to a space analogy, he said it took the Soviet Union and the US about 10 years to launch a rocket into orbit. To get around the moon, it was another 10 years. “No one beat that time,” he said. “It's just the time it takes to do something of that scope and magnitude.”

With the exception of Tesla, which continues to promise the imminent arrival of self-driving technology, a slower timeline has been widely accepted. In 2018, the consultancy Bain said a robotaxi transformation was “just around the corner” and forecast autonomous vehicles would account for up to 30 per cent of the market by 2030. Now it expects the figure to be 4-9 per cent.

“We are at a point now where there is more realism than hype,” said Mark Gottfredson, a Bain partner. 

Waymo, with its deep pockets and a team of 2,100 employees, remains in the lead. Uber, meanwhile, abandoned its project last month, in effect giving away its entire driverless division to rival Aurora, along with a $400m investment, in return for a 26 per cent stake and a board seat.

But some of Waymo’s rivals are making headway. Zoox and GM-backed Cruise have both unveiled purpose-built vehicles that, without a steering wheel or pedals, appear far more futuristic than the “soccer mom” Chrysler Pacificas used by Waymo. 

Zoox executives have described their vehicle as being like the first iPhone — a revolutionary device because the hardware and software were integrated from the ground up.

But Mr Krafcik points out that Waymo had already tried to build a customised vehicle with the Firefly, a fully automated two-seater designed in 2013 and abandoned four years later.

That experience taught Waymo that its exclusive focus should be on the Driver, an Android-like operating system that it wants to operate in multiple vehicle types.

 “We aspire to drive anything that moves on public roads — buses, trucks, cars, whatever,” said Mr Krafcik. “We don’t want to be tied to a single form factor.”

Such an approach could potentially earn Waymo multiple lines of revenue from ride-hailing services, goods delivery and licensing deals. Partners appear eager. Last year alone Waymo struck deals to build driverless ride-hailing vehicles with Volvo, cargo vans with Fiat Chrysler, and semi-trucks with Daimler. 

Some observers have seen this as a pivot away from robotaxis, which may be costly to roll out at scale, but Mr Krafcik argued such conclusions tend to be based on false assumptions. “I read all the time that the hardware associated with the Waymo Driver is $250,000 — and that’s wrong, just completely wrong. It's not even close.”

He declined to go into operating costs, but balked at the scepticism over fully autonomous vehicles and recommended that anyone with doubts simply take a look at Waymo’s investors — including the venture capital groups Silver Lake and Andreessen Horowitz, the institutional investors T Rowe Price and Fidelity, and the car groups Magna and AutoNation.

“We don’t talk too much about our $3.2bn raise but that was the single largest capital raise for a pre-revenue company in the history of the universe,” he said. “They’ve obviously got a lot of confidence in the sort of economics the Waymo Driver can unlock.”

Mr Krafcik did not say when and where its ride-sharing service will launch next. Waymo’s conspicuous vehicles can be seen daily in San Francisco, even at Christmas, but removing the driver and letting tourists in could still be years away. If so, Mr Krafcik seemed unperturbed, knowing well that in a few decades it will matter little which precise year ended up being the inflection point.

Long-term, he remained adamant the technology will disrupt personal car ownership and he had no hesitation forecasting that children born today will have little reason to learn how to drive.

“[They] absolutely will not need a driver’s license — I can say that with 100 per cent confidence,” he said. “[They’ll] be able use Waymo in just about any place that [they] might be.”

Fast-food stocks reveal hunger for Indian shares

Benchmark for broader market has risen 80% from March lows

Investors around the world have been buoyed by the hope that vaccines will deliver an end to the global coronavirus pandemic. In India, they’re celebrating with burgers, pizzas and milkshakes.

In a country with its own strong culinary traditions, investors have rushed into shares of US-style fast-food companies as the broader Indian stock market has risen to new records.

India has not always had the smoothest relations with the US giants of fast food and drink. McDonald’s has had turbulent ride in the country, with growth held back for more than a decade after it became mired in a dispute with a local franchisee. Coca-Cola famously pulled out of India in 1977 for 16 years after facing pressure to reveal its formula and reduce its equity stake in the local business.

But two recent initial public offerings have turned the sector into an Indian investor favourite. Shares in Burger King’s India franchise have risen almost 200 per cent from their offer price in a hot market debut last month. In the IPO of Mrs Bectors, a biscuit and bread maker that supplies outlets including McDonald’s and KFC, demand outstripped supply 198 times for the Rs5.4bn ($74m) of shares on offer. Its shares are up 75 per cent from their offer price after their late December listing.

And shares in Jubilant FoodWorks, which owns the Domino’s Pizza franchise in India, rallied to an all-time high after it said it would launch a new biryani-and-kebab chain last month, extending gains in 2020 to more than 60 per cent.

The sector demand has highlighted a broader hunger for Indian stocks after a difficult year in which coronavirus dealt a brutal blow to the country of 1.4bn people. A strict lockdown pushed the economy into a historic contraction, weakened businesses and rattled markets — all while failing to stem the virus’s spread.

The IMF expects India, which has a Covid-19 caseload second only to the US, to shrink more than 10 per cent in the current financial year. Yet, as elsewhere, investors in India have responded enthusiastically to rapid progress in developing Covid-19 vaccines and an improving local outlook.

Everything from manufacturing activity to motorcycle demand and a string of strong corporate earnings has fuelled hopes that the economy may be getting back on track.

This has been reflected in a stock market rally that propelled the National Stock Exchange’s benchmark Nifty 50 index to new records, up 80 per cent from its March lows. Foreign investors have also piled in, with inflows into Indian equities hitting an all-time high of more than $8bn in November, according to the country’s securities depository.

Stocks in the Nifty 50 are trading on a valuation equivalent to 22 times their forecast earnings over the next 12 months, according to a report from analysts at Nomura last month. They say that figure is 23 per cent higher than its average over the past 10 years.

Such valuations have raised concerns that the market rally itself is at risk of becoming overextended, as signs that India’s recovery is still tentative are lost in the broader bullish narrative.

A similar dynamic is at play with fast-food companies. There are undoubtedly strong growth prospects for the sector in India, as demand for protein rises with incomes and newly affluent middle-class consumers gravitate towards international brands.

Since the arrival of McDonald’s in the 1990s, US chains have reinvented their menus to suit local customs and palates. Many outlets steer clear of beef, which is taboo for many Indians, opting instead for vegetarian or spice-heavy recipes such as paneer burgers or chicken-tikka pizzas.

Deep pockets also help US chains gain share of India’s mostly fragmented food retail market. Covid-19 accelerated consolidation by allowing them to scale up deliveries, which rose 10 per cent last year even as the wider sector shrank, according to consultancy Technopak.

Yet with markets overflowing with liquidity and retail investors searching eagerly for a way into the rally, risks are getting lost in the noise.

For example: Burger King India is not profitable. Its franchise agreement with the global parent obliges the local owner, Singapore private equity group Everstone Capital, to nearly triple the current number of restaurants to 700 by 2026 or face termination of the agreement. However strong its prospects, such a relentless brick-and-mortar expansion looks ambitious, to say the least, in a post-pandemic world.

Analysts at Kotak Institutional Equities say the high valuations of most consumer stocks “leave little scope for any disappointment”. At current valuations, that could be true for the broader Indian market.