TheChek News Flow

Asian stocks and U.S. equity futures climbed on Monday after President Donald Trump suspended his plans for U.S. tariffs on Mexico. Treasuries fell as demand for havens sank.

The Mexican peso jumped the most in almost a year after the U.S.-Mexico agreement that was unveiled late Friday. Japanese, South Korean and Hong Kong stocks rose, as did crude oil prices. Gold fell. China’s shares also rose as the country’s markets reopened after a long weekend. People’s Bank of China Governor Yi Gang said Friday there’s “tremendous room” to ease monetary policy. The yen touched its low of the session after Governor Haruhiko Kuroda said the Bank of Japan can deliver more stimulus if necessary.

Nikkei +1.13% Hang Seng +2.03% CSI +1.54% Shanghai +1.08% Shenzen +1.69%

Eur$ 1.1304 CNH 6.9519 CNY 6.9339 JPY 108.67 GBP 1.2704 CHF 0.9911 WTI $54.35 +0.60%

S&P +0.31% EuroStoxx +0.48% Dax +0.63% FTSE +0.55% SMI +0.69%

Recessionary Panic: Eurodollars Soar To Levels Last Seen During The European Financial Crisis Amid Record Bond Inflows

There is a danger if Fed policy makers err on the side of caution just to show their independence

Central bank independence rests on a shaky platform, and the Federal Reserve’s is especially wobbly. As policy makers prepare to discuss rate cuts, they face double trouble politically. Cutting rates to compensate for the damage done to the U.S. economy by tariffs risks co-opting the Fed into Donald Trump’s trade battles. Worse, easing looks like the Fed is caving in to Mr. Trump’s public demands for rate cuts.

So far Fed chairman Jerome Powell has done a good job of avoiding political controversy, insisting that Mr. Trump holds no sway inside the Fed. But he knows that any perception that the Fed is doing the bidding of the White House would damage its credibility with markets, one of its most powerful tools.

The real danger isn’t that Fed independence is compromised, or at least not yet. Instead, the danger is that the need to show their independence leads policy makers to err on the side of caution, perhaps waiting longer than they otherwise would to show they aren’t being pushed around. At a time when the need for easier money is debatable, it would be natural for policy makers to snub Mr. Trump’s calls for cuts to prove their impartiality. But it would be a mistake.

Start with trade. The tariffs threatened on Mexico have been suspended, but the pending extension of 25% import taxes to all Chinese goods will most likely push up prices in the U.S. and slow the economy. The Fed should look through the immediate price rises and focus on the longer-term damage that would be done to the economy, which would lead to more unemployment and lower inflation than would otherwise have been the case.

China tariffs are unlikely to throw the U.S. into recession on their own (although if they prompted a market crash the combined effects could be much worse). But yet more tariffs should lead the Fed to at least consider lower rates, even if that makes it look as though they are helping out the president.

The broader global slowdown in growth also pushes the Fed toward lower rates. Growth forecasts have been cut, inflation is expected to be moribund almost everywhere in the developed world and other central banks are hinting at easing, or in a couple of cases are already easing. A weak jobs report Friday in the U.S. doesn’t help matters. If the Fed does nothing, the shift in monetary policies overseas will tend to push the dollar up, a de facto tightening in the U.S.

The Fed has three big advantages when it comes to preserving the appearance of independence. It has decades of credibility. It has its record from last year, when it raised rates in the face of the Trump tax cuts, as an independent central bank should. And with the bond markets in a flap about the risks ahead, a rate cut wouldn’t come as a surprise to anyone.

Still, the Fed should be prepared for gleeful tweets from Mr. Trump after any cut, and there would surely be more questions if the Fed does what the White House wants. But the true test of independence isn’t cutting rates when Mr. Trump is right, or at least has a plausible case that they should be cut. The real problem would be to cut rates when Mr. Trump is wrongly demanding a cut.

At the moment it isn’t nearly as obvious as either Mr. Trump or the bond market thinks that rates need to be cut, let alone that they need to be cut a lot. Fed policy makers have made clear recently that cuts are possible, if only as an insurance policy, and Mr. Powell last week acknowledged that Mr. Trump’s trade conflicts are a consideration. Still, the main problem isn’t that the economy is in trouble. The problem is that the economy is doing less well than expected. This matters a lot to markets, which price performance against expectations. But the Fed will be looking at the outlook, which is for so-so growth at a time when the U.S. is managing the rare trick of having plentiful jobs and reasonable (if unspectacular) pay rises without much inflation.

There is a decent case to be made that there is a greater danger of inflation undershooting the Fed’s 2% target than overshooting it, which might justify an “insurance” rate cut. But some in the market are worried that much more might be on the way; for the first time there is a non-negligible chance of five cuts this year, equivalent to one at every meeting, and by December three cuts are priced as more likely than not. That would require things to go badly wrong, and the Fed to be worried that the economy has stalled.

If the trade conflicts worsen and there is a serious fall in stocks, then a dire economic outcome and several rate cuts would be plausible. But so long as the economy keeps up at least the dreary growth of the past decade it is hard to see why the Fed would move to panic stations—whatever Mr. Trump asks for.

United Technologies Strikes Deal to Merge With Raytheon

Combination creates No. 2 aerospace-defense company making everything from F-35 engines to Patriot missile systems

United Technologies Corp. doubled down on the aerospace market with an all-stock deal to merge with defense contractor Raytheon Co. RTN 1.25% , after UTC executives earlier chose to exit the escalator and air-conditioner businesses.

The combined company, valued at more than $100 billion after planned spinoffs, would be the world’s second-largest aerospace-and-defense company by sales behind Boeing Co. BA 0.87% , with annual revenue of about $74 billion this year. It will make everything from engines and seats for jetliners and F-35 jet fighters, to Patriot missile launchers and space suits for astronauts.

The proposed deal intensifies the consolidation in the aerospace and defense industry as plane makers seek better terms from suppliers and the Pentagon puts more pressure on contractors to cut costs and invest more of their own money in new technologies, such as space systems and cybersecurity.

The new company will be named Raytheon Technologies Corp., and executives on Sunday called the deal, which doesn’t include a takeover premium, a merger of equals. UTC shareholders will own 57% of the shares and UTC will appoint eight of the 15 new directors. The Wall Street Journal reported Saturday that the two sides were nearing a deal.

UTC’s current leader, Greg Hayes, will serve as CEO of the merged company, with Raytheon CEO Tom Kennedy as executive chairman for two years. Executives said the merger would allow them to boost research spending and squeeze out some $1 billion in annual costs from the marriage.

Raytheon shareholders will receive 2.3348 shares in the new company for every share they currently own. The combined company will have about $26 billion in debt, with $24 billion coming from UTC. It will be based in the Boston area.

The combined entity would be split about 50/50 between commercial and defense sales, though military is likely to shrink as a proportion as UTC’s Pratt & Whitney division ramps up deliveries of its latest jetliner engines. One-third of the two companies’ aerospace and defense revenue last year—some $25 billion—came from the Pentagon.

“There is some truth to the idea that bigger is better,” Jefferies analyst Sheila Kahyaoglu wrote in a note to clients Sunday. “With common customers there is some leverage to size and the supply chain.”

“What’s even more important is the underlying technology both companies are developing,” Mr. Kennedy said in an interview. Raytheon first approached Mr. Hayes about a deal last year, he said.

Mr. Kennedy pointed to areas such as hypersonics—missiles traveling more than five times the speed of sound—and air-traffic-control systems where the enlarged company can be a dominant player.

Byron Callan, a defense analyst at Capital Alpha LLC., said the proposed deal reflected the likely slowing of military spending increases and the need for companies to boost their investment in new technologies.

The tie-up would complete a radical transformation at UTC, a once sprawling conglomerate that already plans to spin off its Otis elevator and Carrier building-systems businesses into separate companies.

Raytheon would be combining with UTC’s remaining aerospace business, and the companies expect the transaction to close in the first half of next year, after UTC completes the spinoffs.

The deal isn’t expected to attract significant antitrust scrutiny, analysts said, because UTC and Raytheon don’t compete against each other in most of their markets.

“It’s a nonissue,” said Mr. Hayes, with expected divestitures of just $80 million a year in sales. However, the companies have yet to brief the Pentagon or suppliers.

UTC makes engines, landing gear and other parts for commercial and military planes. Raytheon produces missiles such as the Tomahawk together with Patriot missile-defense systems, radars and other electronic-warfare systems.

“There is minimal overlap for the two companies,” said Ms. Kahyaoglu. The companies could mutually benefit from their separate expertise, she said, such as leveraging UTC’s expertise in global positioning systems across Raytheon’s missile programs.

The deal is the largest announced so far in a year that has included some big mergers but otherwise has been lackluster. Before this, the biggest proposed acquisition this year was Bristol-Myers Squibb Co.’s $74 billion purchase of rival drugmaker Celgene Corp.

Farmington, Conn.-based UTC, which acquired Rockwell Collins for $23 billion late last year, is one of the U.S.’s last remaining big industrial conglomerates—though it is set to radically transform with the spinoffs and now the merger.

The Otis elevator division and Carrier building-systems businesses will become separate publicly traded companies, leaving UTC as a pure-play aerospace company.

Investors are pressuring traditional conglomerates to become more focused. Rivals Honeywell International Inc. and General Electric Co. are both shaving off units to streamline their businesses. Several activist investors had pushed UTC to split.

Waltham, Mass.-based Raytheon’s sales rose 6.7% last year to $27.1 billion but it has largely avoided big deals. It has invested heavily in recent years ahead of the recent uptick in Pentagon spending, and has the biggest export business among the five largest U.S. defense contractors.

The two-year uptick in Pentagon spending on new aircraft, missiles and other defense equipment is also running out of steam, with analysts projecting muted growth over the next several years.

Pentagon spending fell sharply between 2013 and 2017 because of broader federal budget pressures and then expanded at a clip of around 10% in the final year of the Obama administration budget and the first two of the Trump era. Spending increases are now slowing to low single-digit increases, and much of the additional money is being directed at refreshing U.S. nuclear forces.

A major defense industry merger has the benefits of providing economy of scale, making its supply chain leaner and creating an export powerhouse. But it can also threaten stagnation of research and development and make prices creep up at home, said Gregory Sanders, a deputy director at the Center for Strategic and International Studies, a Washington-based think tank. The merger partners said they’d expand research spending.

“There are a lot of countries that encourage mergers because they’re primarily focused on export markets,” he said. “But from the U.S. perspective that always has to be weighed against the domestic market. Much of what we’re producing is for the U.S. market.”

A market behemoth may be good at selling hardware, but fewer competitors mean that prices across the board can go up, which can be a problem for the main customer: the U.S. taxpayer. Mr. Kennedy said one-half the $1 billion in annual benefits from the merger would accrue to customers, most of it via lower prices for the Pentagon.

The battle in Israel to create an unhackable phone

Nobumasa Yokoo’s 966 days in pre-trial detention echo treatment of ex-Nissan boss Ghosn

Almost three years of detention before trial. Eight-hour interrogations in harsh physical conditions. New charges brought at the last minute. It may sound like dystopian fiction but that is what happened when Japanese financier Nobumasa Yokoo declined to confess.

The prosecution of former Nissan chairman Carlos Ghosn has shone a spotlight on Japan’s criminal justice system, but his initial 108 days in detention pale by comparison with the 966 days Mr Yokoo — a leading figure in the fraud scandal at medical equipment maker Olympus — spent locked up before his trial.

The methods Mr Yokoo described in an interview with the Financial Times highlight concerns about so-called “hostage justice” and the extreme pressure applied to extract confessions in Japan.

“I’ve never met Carlos Ghosn, I don’t know him and frankly I don’t know what he did,” he said at a press conference. “But I do note a striking parallel in our cases, especially in the way the prosecutors chose to arrest him for one charge and then drag things on by arresting him on another charge.”

Mr Yokoo’s case was overseen by the same prosecutor who is now pursuing the ex-Nissan chief.

Mr Ghosn is living in Tokyo under strict bail conditions as he awaits trial on charges of financial misconduct. He has denied all charges. 

The long detention of Mr Ghosn has prompted international outrage and put Japan’s justice system, which boasts a 99.97 per cent criminal conviction rate, in the dock. Prosecutors say they lack other investigative tools, such as wiretaps or subpoena powers, so extracting a confession is all important.

At a briefing in January, Shin Kukimoto, deputy chief prosecutor, denied criticism that the long detention period and intensive interrogations lasting up to eight hours a day could create an environment for forced confessions. “We listen properly to claims made by the suspect,” Mr Kukimoto said at a briefing. “We don’t do the kind of interrogation that forces a confession.”

Not everyone agrees that this is the best approach.

“Japan has long relied too heavily on confessions. There was criticism but it stayed inside the country,” said Shuhei Sugimoto, a criminal defence lawyer. “But now, the Japanese system is facing pressure from where it had least expected, and that international criticism could be a catalyst for change.”

Mr Yokoo was a retired Nomura banker when he became embroiled in the Olympus affair, which began in 2011 when Michael Woodford, the company’s chief executive, exposed a long-running scheme to hide losses via dubious acquisitions. 

Mr Yokoo, a financial adviser to Olympus, was found guilty of abetting the falsification of financial statements, money laundering and defrauding a separate company called Gunei. He must report to prison imminently after an appeal to Japan’s supreme court failed earlier this year.

Mr Yokoo maintains his innocence but irrespective of guilt, his case shows the pitiless treatment meted out to any defendant in Japan who does not confess. 

“I was detained for two to three months at Marunouchi police station. Except for the weekends, the prosecutors would pack us in a tight space in their basement with our hands cuffed from 9am to 5pm every single day,” he told the FT. “On the worst days, they would interrogate me for just three minutes and I would have to wait on a hard wooden bench for the rest of the day.” 

One weekend, Mr Yokoo was packed into a bus with a few burly police officers and driven for hours to his “crime scene” at the Gunei headquarters, even though the charges related to abstract financial transactions. This was “nothing beyond harassment”, he alleged. 

“I was interrogated without any recording and many times before the actual arrest,” he said. No lawyer was present. When he asked for a heater during interrogation on a cold December day, he said the prosecutor slammed the table with a rolled-up paper and shouted: “We’re not rich like you guys! We’re poor so we can’t afford heating!” 

The Tokyo district public prosecutors office declined to comment on Mr Yokoo’s claims. 

Perhaps more extreme than the nature of the interrogations was their duration. Mr Yokoo said he saw his family for only three hours during more than two-and-a-half years of pre-trial detention. At one point during his detention, he was prescribed a strong tranquilliser after he began hitting his head on the wall at 3am.

New charges brought 16 months after his initial arrest, and one month before his trial was due to start, meant another half-year in pre-trial detention. Akira Kitani, a judge turned defence lawyer, has also questioned an unusual decision by the court to let prosecutors revise their charges against Mr Yokoo during the final phase of his trial. 

“In this case, the request for a revision in charges should not have been permitted . . . considering that there was a long period for both sides to adjust their claims during pre-trial proceedings,” Mr Kitani said.

While pleading guilty usually results in a lighter sentence, the contrast between Mr Yokoo and others in the Olympus case is stark. While Mr Yokoo was sentenced to four years in prison and ordered to pay $12m in penalties, the Olympus executives who actually falsified the accounts pled guilty and received suspended sentences, spending 40 days in detention at most. That gap creates a powerful incentive to confess.

Although Mr Yokoo has exhausted his avenues of appeal, he is now seeking a retrial after two pieces of evidence that were deemed critical in his criminal trial were discarded by the judge in a separate civil lawsuit. 

The seven-year process has been tough for Mr Yokoo’s family. “We’re going to lose our house, we’re going to lose all our assets,” said Yuka Yokoo, his daughter. “But something I don’t look forward to is seeing anyone else experience this horrible treatment by this horribly flawed legal system.”