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CURRENCIES

Jul 29 prev

$ per € 1.178 1.173

$ per £ 1.296 1.294

£ per € 0.908 0.906

¥ per $ 105.105 104.975

¥ per £ 136.252 135.885

SFr per € 1.077 1.076

€ per $ 0.849 0.853

Jul 29 prev

£ per $ 0.771 0.773

€ per £ 1.101 1.104

¥ per € 123.756 123.121

£ index 77.506 77.007

SFr per £ 1.186 1.187

COMMODITIES

Jul 29 prev %chg

Oil WTI $ 41.35 41.04 0.76

Oil Brent $ 43.76 43.22 1.25

Gold $ 1940.90 1936.65 0.22

INTEREST RATES

price yield chg

US Gov 10 yr 108.73 0.58 -0.02

UK Gov 10 yr 0.12 0.01

Ger Gov 10 yr 105.33 -0.50 0.01

Jpn Gov 10 yr 100.99 0.02 -0.01

US Gov 30 yr 120.17 1.24 0.00

Ger Gov 2 yr 104.71 -0.69 0.00

price prev chg

Fed Funds Eff 0.08 0.05 0.03

US 3m Bills 0.11 0.11 0.00

Euro Libor 3m -0.45 -0.44 -0.01

UK 3m 0.09 0.09 0.00
Prices are latest for edition Data provided by Morningstar

Eric Platt — New York
Kadhim Shubber — Washington

The dizzying revival of Kodak, the
former photography titan that faded in
the digital age, hit new heights yester-
day as its shares surged by as much as
2,757 per cent for the week after the
Trump administration offered it a
financial lifeline to manufacture coro-
navirus drug ingredients.

The stock was halted more than a dozen
times within the first two hours of trad-
ing, a day after its stock more than tri-
pled in value. The pace of trading in the
stock far surpassed anything seen since
the company returned to the New York
Stock Exchange after its emergence
from bankruptcy in 2013.

Trading in Kodak first rocketed on
Monday, the day before news that the
company had secured a $765m loan to

produce drug ingredients under the
Defense Production Act. Some 1.65m
shares changed hands then, more than
14 times the daily average over the pre-
ceding 10 trading days, according to
data compiled by Bloomberg.

The Securities and Exchange Com-
mission declined to say if it was investi-
gating the surge in trading activity
ahead of the US government’s announ­-
cement. Kodak did not respond to
requests to comment on the matter.

Trading volumes continued to rise
over the following two days, with more
than $6.6bn worth of the stock —
roughly 450m shares — traded by mid-
day New York time yesterday. The com-
pany’s valuation has jumped from just
over $100m to $1.5bn this week.

The stock, which briefly touched $60
a share, quickly found its way into retail
trading accounts. Investors on the popu-

lar stock-trading app Robinhood were
among the big purchasers.

Jim Continenza, executive chairman
of Kodak, told the Financial Times on
Tuesday the company would use the
government loan to produce ingredients
for generic medicines, including some
that could be used to treat Covid-19.

Mr Continenza joined the company’s
board in 2013 after Kodak’s failed
attempts to remake its analogue film
business landed it in bankruptcy. The
presiding judge called the failure “a
tragedy of American economic life”.

Kodak has tried to pivot its business
model before. In 2018, it latched on to
the popularity of blockchain and
cryptocurrencies, lending its name to
KodakCoin, a tool to help photo­-
graphers secure payment for digital
image rights. The move also sent its
shares skywards — briefly.

Kodak becomes the picture of health as
shares rocket on coronavirus drug deal

© THE FINANCIAL TIMES LTD 2020
No: 40,465 ★

Printed in London, Liverpool, Glasgow, Dublin,
Frankfurt, Milan, Madrid, New York, Chicago, San
Francisco, Orlando, Tokyo, Hong Kong, Singapore,
Seoul, Dubai, Doha

Analysis i PAGE 3

Russia’s far eastern rallies
put Putin populism to test

Australia A$7.00(inc GST)
China RMB30
Hong Kong HK$33
India Rup220
Indonesia Rp45,000
Japan ¥650(inc JCT)
Korea W4,500
Malaysia RM11.50
Pakistan Rupee 350
Philippines Peso 140
Singapore S$5.80(inc GST)
Taiwan NT$140
Thailand Bht140
Vietnam US$4.50

Briefing

i US Fed pledges more help for recovery
The Federal Reserve has extended measures to deal
with a global dollar shortage. It held interest rates
close to zero and pledged to do more to support the
recovery if necessary. It announced it would extend
emergency swap lines with other central banks
until the next year’s first quarter.— WWW.FT.COM

i Santander posts €11bn quarterly loss
Santander slumped to an €11.1bn second-quarter
loss after the pandemic forced the eurozone’s largest
bank to take writedowns on the value of several of its
units, led by its UK arm.— PAGE 5; LEX, PAGE 16

i Boeing set for further production cuts
The Chicago-based plane-
maker plans deeper cuts to
output rates and employment
levels, as its chief said it would
take three years for the sector to
recover from Covid-19.— PAGE 6

i Fresh US stimulus plan hits impasse
The Trump administration clashed with Democratic
leaders in Congress over stimulus measures to prop
up the struggling US economy.— PAGE 4

i Pilots at FedEx urge pause on HK flights
FedEx pilots have called on the cargo group to halt
operations to Hong Kong after saying that they were
subjected to “unacceptable risks” under the city’s
tightened coronavirus curbs on air crew.— PAGE 4

i TikTok accuses Facebook of smearing
In his first public comments since taking TikTok’s
helm, Kevin Mayer has accused Facebook of trying
to destroy the Chinese app’s US business by smearing
it with “maligning attacks”.— PAGE 5

i Wizz Air pledges to expand fleet
Hungarian budget airline Wizz Air has pledged to
expand its fleet by 50 per cent over the next three
years as rivals retrench.— PAGE 6

Datawatch

Almost two-thirds
of people in
England have
suffered from
anxiety and poor
sleep during
the lockdown,
compared with
less than half
beforehand.
Respondents also
reported a rise in
binge eating and
suicidal thoughts.

Mental health shift
% of respondents in England

0 20 40 60
Anxiety

Poor sleep
Persistent

sadness
Binge eating

Suicidal
thoughts

Since lockdown
Regularly before lockdown

Survey of 837 adults (Jun 19 - Jul 6 2020)
Source: Potter, C. et al (University of Oxford)

Moral hazard
State equity support poses new EU
headache — INSIDE BUSINESS, PAGE 5

THURSDAY 30 JULY 2020

3 The ETF canary in the corporate bond
coalmine — GILLIAN TETT, PAGE 15
3 How a popular arbitrage trade capsized
the Treasury market — BIG READ, PAGE 13

Lessons from
March mayhem

Katrina Manson — Washington

The Trump administration is to with-
draw nearly 12,000 troops from Ger-
many, in a move set to raise tensions
within Nato where US forces have been a
keystone of the western alliance.

President Donald Trump last month
vowed to cap US soldiers stationed in
Germany at 25,000 unless Berlin spent
more on defence.

Defence secretary Mark Esper said
yesterday that the US would start the
withdrawal of about 11,900 troops “in a
matter of weeks”, with about 5,400 relo-
cating elsewhere in Europe and about
6,400 set to return to the US. About
24,000 will remain in Germany.

He said that the reduction would see
some troops move east to “strengthen

Nato, enhance the deterrence of Russia,
and meet the other principles”, includ-
ing reassuring allies. But critics have
warned that it would undermine a
strong symbol of Washington’s commit-
ment to its European allies and
embolden Russia, which has been keen
to exploit splits between Nato members.

“Instead of strengthening Nato it is
going to weaken the alliance,” said Nor-
bert Röttgen, head of the foreign affairs
committee of Germany’s parliament, in
a tweet. He argued that the withdrawal
would decrease US military clout in
relation to Russia, the near East and
Middle East.

US senator Mitt Romney, one of the
few senior Republicans to break with Mr
Trump, said the decision was a “gift to
Russia”, with lasting and harmful conse-

quences for US interests. It would be a
“slap in the face” for a friend and ally.

But a senior defence official said relo-
cating troops would allow the US to
react to “very aggressive Russian activ-
ity . . . and also increasingly aggressive
Chinese posture in the Mediterranean,
in south-eastern Europe”.

Nato said that the US had consulted
closely with allies before making the
decision. Jens Stoltenberg, Nato secre-
tary-general, said the US announce-
ment underlined “the continued com-
mitment” towards Nato and European
security, and that European peace and
security was also important for North
American security and prosperity.

Mr Trump yesterday described Ger-
many as “delinquent”, asking why the
US would keep all its troops there when

it fell short on its spending commit-
ments to Nato.

Germany spent 1.3 per cent of GDP on
defence last year and is among Nato
members that vowed to meet a 2 per
cent threshold by 2024.

A senior US defence official said it
would cost potentially “billions of dol-
lars” to build housing in America for
the returning troops.

Pentagon officials justified the deci-
sion by saying Germany was no longer
“a frontline country” for US operations
in Europe. General John Hyten, vice-
chairman of the joint chiefs of staff, said
yesterday the reallocation would “bol-
ster” US commitment to its allies as it
would “better distribute forces across
Europe and increase the use of rota-
tional forces”.

US decision to pull 12,000 troops
from Germany feeds Nato friction
3 Trump calls Berlin ‘delinquent’3 Funding fears spur move 3 Critics warn of ‘gift to Russia’

Tech titans
Bosses grilled
on Capitol Hill
The bosses of four of America’s biggest
tech groups were told their companies
wielded “too much power” yesterday as
they faced interrogation by a panel of
politicians on Capitol Hill.

Democratic congressman David Cicil-
line, leader of the House judiciary com-
mittee’s antitrust subcommittee, told,
from left, Jeff Bezos of Amazon, Tim
Cook of Apple, Sundar Pichai of Micro-
soft and Facebook’s Mark Zuckerberg
that many practices of the groups “dis-
courage entrepreneurship, destroy jobs,
hike costs and degrade quality”.

The subcommittee, along with other
agencies, is considering whether the big
tech groups should face curbs on their
market power.
Big Tech accused page 2

AP

The US defence
secretary said
that the pullout
of 11,900 troops
would begin in ‘a
matter of weeks’

JULY 30 2020 Section:FrontBack Time: 29/7/2020 - 19:15 User: nick.miller Page Name: 1FRONT USA, Part,Page,Edition: ASI, 1, 1

Page 2

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2 ★ FINANCIAL TIMES Thursday 30 July 2020

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Leila Abboud — Paris
Michael Peel — Brussels

Shortly after France emerged from its
coronavirus lockdown in June, Presi-
dent Emmanuel Macron donned a sur-
gical gown and mask to visit a Sanofi
research centre near Lyon.

The trip was not only intended to laud a
French pharmaceuticals champion, but
to unveil what the president cast as a
much needed initiative to bring produc-
tion of critical medicines back to
Europe.

First would be painkiller paraceta-
mol, with France aiming to reshore pro-
duction within three years, said Mr
Macron. Although the drug did not run
out at the peak of the Covid-19 crisis,
sales in France and elsewhere were
rationed, while across Europe there
were fears supplies of intensive care
drugs would dry up.

In France, critics said the pandemic
exposed the weakness of its healthcare
system after masks, tests and drugs ran
short, leaving it with far more deaths
than Germany.

“Everyone saw during this crisis that

certain drugs were no longer manufac-
tured in France or even in Europe,” Mr
Macron said in a speech at Sanofi. “We
must draw lessons from that . . . and the
state is ready to invest in such reshoring
projects.”

Even before Covid-19, France strug-
gled with increasing shortages of medi-
cines. There were 44 incidents reported
to regulators in 2008, rising sharply to

868 in 2018, according to a government
report. Experts blame multiple causes,
including fragmented supply chains and
pressure to keep costs low.

Manufacturing of the active pharma-
ceutical ingredients (APIs) for many
drugs has shifted to lower-cost Asian
countries in the past 20 years. A paper
prepared for the EU’s pharmaceutical
committee in March suggested as much
as 90 per cent of the APIs for so-called
small molecule drugs (traditional, not
biotech drugs) were sourced from India
and China, although that was based on
2008 data. Industry groups put the cur-
rent figure at 50 to 80 per cent.

In June, Mr Macron was one of six EU
leaders who wrote to Ursula von der
Leyen, European Commission presi-
dent, to ask Brussels to give incentives
to develop production capacity in
the bloc for critical ingredients and
medicines.

Commission officials have stepped up
pre-pandemic work on drug supply
security and have been in discussions
with pharmaceutical companies on how
supply chains could be strengthened
with Brussels’ help.

France chose paracetamol as the
emblem for the reshoring push because
it is the country’s top-selling medicine
and, with only a few companies in the
country involved in its manufacture, it
seemed a relatively straightforward
problem to solve, a government official
said.

The main hurdle will be convincing
companies to manufacture the drug’s
API in France. Sanofi and UPSA, which
sell about 90 per cent of the paraceta-
mol in the country, source their API
from the US, China and India. The last
European factory manufacturing it was
in Roussillon, southern France, but it
closed in 2008.

Hichem Jouaber, managing director
and pharmaceutical industry consult-
ant at AlixPartners, said it would be pos-
sible to reshore paracetamol production
with adequate government subsidies
but questioned the point of doing so
given that it was a commodity that could
be produced more cheaply in Asia.

“This seems to me more like a politi-
cal response to the Covid-19 crisis. I
would not be surprised if the project
gets discreetly buried,” he said.

Pharmaceuticals

France drives EU effort to reshore drug making

France falls short
Number of drug shortages per year

0

200

400

600

800

1,000

1,200

1,400

2012 14 16 18 19

Pharmaceutical products
Active pharmaceutical ingredients (INN)

Forecast

Source: Report to France’s prime minister on strategic
mission to reduce shortages of essential medicines

Socially-distanced pilgrims, moving
several feet apart, circle the cube-
shaped Kaaba in the first rituals of
the hajj in the Muslim holy city of
Mecca, Saudi Arabia.

The annual event, which began
yesterday, has been severely
curtailed as the authorities seek to
limit the spread of coronavirus in the
kingdom.

A main pillar of Islam, the
pilgrimage is a once-in-a-lifetime
duty for every able-bodied Muslim
who is able to afford it.

The hajj, which is intended to bring
about greater humility and unity
among Muslims, normally attracts
more than 2.5m people from across
the world. However, this year the
Saudi government has barred
pilgrims from overseas and limited
numbers to around 10,000.

Pilgrimage
Virus limits
hajj numbers

Saudi media ministry/AP

Anna Gross — London

The chair of the UK government’s vac-
cine task force has damped hopes of
finding a “silver bullet” that provides
lifetime immunity against Covid-19
despite a week of positive trial results
for potential inoculations.

Kate Bingham told the Financial Times
it was more likely scientists would
develop either a vaccine that provides a
year’s immunity or one that only miti-
gates the symptoms of the virus.

“The assumption at the moment is
that we’ll be shooting to get to a
year’s immunity,” said Ms Bingham,
who is coordinating efforts to develop,
produce and disseminate a vaccine in
the UK.

“What I’ve been anxious about is that
people . . . think we’ll have a silver bul-

let. That’s probably not going to
happen.” Even a two-dose vaccine
might not last very long, cautioned Ms
Bingham, who is also managing partner
at SV Health Investors, a healthcare
fund manager. “You may need to boost
[it] every year,” she said. “At minimum,
we want to reduce symptoms, we want
to stop people from dying. We have to
accept that’s maybe where we’ll end up.”

Positive results from several trials last
week sparked hopes that a lifetime vac-
cine might soon be found. Moderna and
Pfizer, with its partner BioNTech, both
launched large late-stage trials in the US
on Monday, hoping to deliver results
later this year. AstraZeneca and its part-
ner, the University of Oxford, have
already launched a late-stage trial in the
UK, South Africa and Brazil. Johnson &
Johnson and Novavax both plan to

launch their phase three trials in the
autumn. But studies showing that anti-
body levels diminish over time have
knocked hopes that a single treatment
could provide total immunity.

Experts are still hoping for a “sterilis-
ing vaccine”, which would provide long-
lasting immunity after one or two doses,
“but going from nought to that is quite a

big swing”, Ms Bingham said, noting
that at present there was no vaccine for
any coronavirus strain.

Data from studies of Sars-Cov-1 —
another virus — showed that antibodies
started dropping off after just four
weeks and recent papers have suggested
that they diminish at a faster rate for
Sars-Cov-2, the virus that causes
Covid-19.

The goal of late-stage vaccine trials is
to prevent participants from developing
Covid-19. But researchers are also
watching to see if they can stop patients
developing severe symptoms, in an
admission that the early vaccines might
reduce only hospital admissions rather
than infections.

Ms Bingham, whose work has led to
the launch of six drugs for the treatment
of patients with autoimmune diseases

and cancer, said that if several vaccines
were found to be effective at reducing
the severity of Covid-19 symptoms, it
may be that people are given a mix of
different options to enhance their
immune response. All of the trials so far
are for two doses — an initial shot fol-
lowed by a booster — apart from the
Oxford university/AstraZeneca vaccine,
which has not yet confirmed whether it
will be a single or double-dose vaccine.

Last week, the UK government
announced it had invested £100m in a
manufacturing facility in Essex, close to
London, which will have capacity to
produce millions of vaccine doses per
month and is scheduled to open in
December 2021.
Additional reporting by Hannah Kuchler in
New York
Vaccine’s $60 price tag see Companies



Medical quest

British expert lowers expectations for ‘silver bullet’ vaccine

Kate
Bingham:
has a record
in launching
drugs for
autoimmune
diseases

Mark
Zuckerberg
argues that
limiting the
actions of US
tech groups will
open the door
to Chinese
competitors

INTERNATIONAL

Dave Lee — San Francisco

The chief executives of four US tech
groups yesterday were facing accusa-
tions of wielding their companies’ size to
unfairly squash competition, as they
prepared for a grilling from lawmakers
on Capitol Hill.

Amazon’s Jeff Bezos, Facebook’s Mark
Zuckerberg, Apple’s Tim Cook and Sun-
dar Pichai of Google’s parent company
Alphabet, however, were set to tout
their companies — which have a com-
bined market value of $5tn — as
“uniquely American” success stories,
directly creating more than 1m jobs in
the country and enabling the prosperity
of small and medium-sized businesses.

With the executives on video links to
the House judiciary committee’s anti-

trust subcommittee, the event was the
first time all four chief executives had
been involved in the same hearing. For
Mr Bezos, it was the first time he had
personally addressed Congress, some 26
years after founding his company.

“To fulfil our promises to customers
in this country, we need American
workers to get products to American
customers,” he was to tell lawmakers,
according to prepared testimony.

The subcommittee, led by Democrat
congressman David Cicilline, has for the
past year been investigating an assort-
ment of complaints about Big Tech,
alongside similar probes from other
agencies, including the US Department
of Justice and the Federal Trade Com-
mission, as well as the European Com-
mission.

In his opening remarks, Mr Cicilline
said the companies were too powerful
and were squelching competition, crea-
tivity and innovation.

“Many of the practices used by these

companies have harmful economic
effects,” he said. “They discourage
entrepreneurship, destroy jobs, hike
costs and degrade quality. Simply put,
they have too much power.”

While concern over the power of Big
Tech is considered a bipartisan issue,
the two US political parties are at odds
on the nature of the threat. Republicans
at the hearing were expected to use the
opportunity to rail against what they
claim to be an anticonservative bias on
the platforms.

On Twitter, President Donald Trump
threatened to use executive orders to
“bring fairness to Big Tech”.

“In Washington, it has been ALL
TALK and NO ACTION for years, and
the people of our Country are sick and
tired of it!” he wrote.

Free speech arguments aside, the
accusations across all of the investiga-
tions are broadly the same. Amazon, as
the dominant ecommerce retailer, and
Apple, as custodian of its highly lucra-

tive App Store, are said to be onerous
gatekeepers of their platforms, charging
fees while favouring their own products
in their respective marketplaces, utilis-
ing insights from data not available to
outsiders.

Facebook and Alphabet are said to be
using their dominant positions in social
media and search to buy up smaller
rivals in order to cement their position,
as well as using the enormous reach of
those networks to push consumers
towards their own products, such as
shopping services.

Mr Zuckerberg was to argue that lim-
iting the actions of US tech groups would
open the door to Chinese competitors.

“Many other tech companies share
these values, but there’s no guarantee
our values will win out,” Mr Zuckerberg
was to say. “For example, China is build-
ing its own version of the internet
focused on very different ideas, and
they are exporting their vision to other
countries.”

Washington hearing

Big Tech accused of having too much power
Four chiefs defend their
companies against claims
of squashing competition

Federica Cocco — London

French consumer confidence declined
in July, denting hopes that the econ-
omy would bounce back rapidly from
the coronavirus crisis.

After an initial rebound in June, the
French statistics agency’s consumer
sentiment index fell two points to 94 in
July, below the average of 99 forecast by
economists in a poll by Reuters.

A score below 100 indicates that con-
sumer confidence is lower than its long-
term average, whereas a score above
that mark suggests that sentiment is
above average.

French households felt their financial
situation was deteriorating and did not
believe now was a suitable time to make
big purchases, the national statistics
agency Insee said. The share of French
households who thought it was better to
save than to spend increased for the
third consecutive month.

Fears about unemployment have
decreased slightly but remain well
above the long-term average. Fewer
French households believe the standard
of living in the country has improved
during the past year.

Jessica Hinds, an economist at Capital
Economics, said: “Households’ unem-
ployment expectations remained very
high, suggesting that the extension of
the temporary unemployment scheme
has done little to reassure employees
about their job prospects, even as

economic activity has improved.”
Julien Manceaux, senior economist at

ING, said that “removing all doubts
from consumers will take time”.

“The main component holding back
household confidence to return to the
high levels of the beginning of the year is
their fear of unemployment,” he said.

The autumn could see a further dip in
confidence, he added. “Once the holi-
days are over and with it the euphoria of
renewed freedom of movement, [con-
sumers could] return to more cautious
saving and consumption behaviours
after the summer.”

Daniela Ordóñez, chief French econo-
mist at Oxford Economics, said the
French government could do more to
help rebuild consumer confidence.

“The recovery package presented by
the French government is very much
supply-oriented, and contrasts strongly
with the German package which is
clearly supporting demand,” she said,
referring to Germany’s temporary cut in
value added tax.

“While helping the most affected
industries is certainly positive, some
demand-oriented measures might be
needed to ensure the recovery of French
consumer confidence and domestic
demand,” Ms Ordóñez said.

Meanwhile in Spain, the tourism
industry’s woes contributed to a slug-
gish recovery. The retail sector experi-
enced a 17.8 per cent month-on-month
increase in sales turnover in June, but
sales remained 4.7 per cent below their
level in the same month last year.

Sentiment index

Fall in French
consumer
confidence
dims hopes
for recovery

‘The main component
holding back household
confidence . . . is fear of
unemployment’

‘We need
American
workers
to get
products to
American
customers’
Jeff Bezos

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Dow Jones Ind 20703.38 20659.32 0.21

FTSEuro�rst 300 1500.72 1493.75 0.47

Euro Stoxx 50 3481.67 3475.27 0.18

FTSE 100 7369.52 7373.72 -0.06

FTSE All-Share 4011.01 4011.80 -0.02

CAC 40 5089.64 5069.04 0.41

Xetra Dax 12256.43 12203.00 0.44

Nikkei 19063.22 19217.48 -0.80

Hang Seng 24301.09 24392.05 -0.37

FTSE All World $ 297.99 297.73 0.09

CURRENCIES

Mar 30 prev

$ per € 1.074 1.075

$ per £ 1.249 1.241

£ per € 0.859 0.866

¥ per $ 111.295 111.035

¥ per £ 139.035 137.822

€ index 89.046 89.372

SFr per € 1.069 1.072

Mar 30 prev

€ per $ 0.932 0.930

£ per $ 0.801 0.806

€ per £ 1.164 1.155

¥ per € 119.476 119.363

£ index 76.705 76.951

$ index 104.636 103.930

SFr per £ 1.244 1.238
COMMODITIES

Mar 30 prev %chg

Oil WTI $ 50.22 49.51 1.43

Oil Brent $ 52.98 52.54 0.84

Gold $ 1248.80 1251.10 -0.18

INTEREST RATES

price yield chg

US Gov 10 yr 98.87 2.38 0.00

UK Gov 10 yr 100.46 1.21 -0.03

Ger Gov 10 yr 98.68 0.39 -0.01

Jpn Gov 10 yr 100.45 0.06 0.00

US Gov 30 yr 100.14 2.99 0.01

Ger Gov 2 yr 102.58 -0.75 0.00

price prev chg

Fed Funds E� 0.66 0.66 0.00

US 3m Bills 0.78 0.78 0.00

Euro Libor 3m -0.36 -0.36 0.00

UK 3m 0.34 0.34 0.00
Prices are latest for edition Data provided by Morningstar

LAURA NOONAN — DUBLIN
JENNIFER THOMPSON — LONDON

AboastfulWhatsAppmessagehas cost
a London investment banker his job
and a £37,000 fine in the first case of
regulators cracking down on commu-
nications over Facebook’s popular
chatapp.

The fine by the Financial Conduct
Authority highlights the increasing
problem new media pose for companies
that need to monitor and archive their
staff’scommunication.

Several large investment banks have
banned employees from sending client
information over messaging services
including WhatsApp, which uses an
encryption system that cannot be
accessed without permission from the
user. Deutsche Bank last year banned
WhatsApp from work-issued Black-

Berrys after discussions with regulators.
Christopher Niehaus, a former Jeffer-

ies banker, passed confidential client
information to a “personal acquaint-
ance and a friend” using WhatsApp,
according to the FCA. The regulator said
Mr Niehaus had turned over his device
tohisemployervoluntarily.

The FCA said Mr Niehaus had shared
confidential informationonthemessag-
ing system “on a number of occasions”
lastyearto“impress”people.

Several banks have banned the use of
new media from work-issued devices,
but the situation has become trickier as
banks move towards a “bring your own
device” policy. Goldman Sachs has
clamped down on its staff’s phone bills
as iPhone-loving staff spurn their work-
issuedBlackBerrys.

Bankers at two institutions said staff
are typically trained in how to use new

media at work, but banks are unable to
ban people from installing apps on their
privatephones.

Andrew Bodnar, a barrister at Matrix
Chambers, saidthecaseset“aprecedent
in that it shows the FCA sees these mes-
saging apps as the same as everything
else”.

Information shared by Mr Niehaus
included the identity and details of a
client and information about a rival of
Jefferies. In one instance the banker
boasted how he might be able to pay off
hismortgage ifadealwassuccessful.

Mr Niehaus was suspended from Jef-
feries and resigned before the comple-
tionofadisciplinaryprocess.

Jefferies declined to comment while
Facebook did not respond to a request
forcomment.
Additional reportingbyChloeCornish
Lombard page 20

Citywatchdog sends a clearmessage as
banker loses joboverWhatsAppboast

Congressional Republicans seeking to
avert a US government shutdown after
April 28 have resisted Donald Trump’s
attempt to tack funds to pay for a wall
on the US-Mexico border on to
stopgap spending plans. They fear
that his planned $33bn increase in
defence and border spending could
force a federal shutdown for the first
time since 2013, as Democrats refuse
to accept the proposals.
US budget Q&A and
Trump attack over health bill i PAGE 8

Shutdown risk as border
wall bid goes over the top

FRIDAY 31 MARCH 2017

Briefing

iUSbargain-hunters fuel EuropeM&A
Europe has become the big target for cross-border
dealmaking, as US companies ride a Trump-fuelled
equity market rally to hunt for bargains across the
Atlantic.— PAGE 15; CHINA CURBS HIT DEALS, PAGE 17

iReport outlines longerNHSwaiting times
A report on how the health service can survive
more austerity has said patients will wait longer for
non-urgent operations and for A&E treatment while
some surgical procedures will be scrapped.— PAGE 4

iEmerging nations in record debt sales
Developing countries have sold record levels of
government debt in the first quarter of this year,
taking advantage of a surge in optimism toward
emerging markets as trade booms.— PAGE 15

i London tower plans break records
A survey has revealed that a
record 455 tall buildings are
planned or under construction
in London. Work began on
almost one tower a week
during 2016.— PAGE 4

iTillerson fails to ease Turkey tensions
The US secretary of state has failed to reconcile
tensions after talks in Ankara with President Recep
Tayyip Erdogan on issues including Syria and the
extradition of cleric Fethullah Gulen.— PAGE 9

iToshiba investors doubt revival plan
In a stormy three-hour meeting, investors accused
managers o�aving an entrenched secrecy culture
and cast doubt on a revival plan after Westinghouse
filed for Chapter 11 bankruptcy protection.— PAGE 16

iHSBCwoos transgender customers
The bank has unveiled a range of gender-neutral
titles such as “Mx”, in addition to Mr, Mrs, Miss or
Ms, in a move to embrace diversity and cater to the
needs of transgender customers.— PAGE 20

Datawatch

UK £2.70 Channel Islands £3.00; Republic of Ireland €3.00

© THE FINANCIAL TIMES LTD 2017
No: 39,435 ★

Printed in London, Liverpool, Glasgow, Dublin,
Frankfurt, Brussels, Milan, Madrid, New York,
Chicago, San Francisco, Washington DC, Orlando,
Tokyo, Hong Kong, Singapore, Seoul, Dubai

Subscribe In print and online
www.ft.com/subscribenow
Tel: 0800 298 4708

For the latest news go to
www.ft.com

Recent attacks —
notably the 2011
massacre by
Anders Breivik in
Norway, the
attacks in Paris
and Nice, and the
Brussels suicide
bombings — have
bucked the trend
of generally low
fatalities from
terror incidents in
western Europe

Sources: Jane’s Terrorism and Insurgency Centre

Terror attacks in western Europe

Highlighted attack Others

Norway
Paris Nice

Brussels

A Five Star plan?
Italy’s populists are trying to woo
the poor — BIG READ, PAGE 11

WORLDBUSINESSNEWSPAPER

Trump vs the Valley
Tech titans need to minimise
political risk — GILLIAN TETT, PAGE 13

Dear Don...
May’s first stab at the break-up
letter — ROBERT SHRIMSLEY, PAGE 12

Lloyd’s of London chose Brus-
sels over “five or six” other
cities in its decision to set up an
EU base to help deal with the
expected loss of passporting
rightsafterBrexit.

John Nelson, chairman of the
centuries-old insurance mar-
ket, said he expected other

insurers to follow. Most of the
business written in Brussels
will be reinsured back to the
syndicates at its City of London
headquarters,picturedabove.

The Belgian capital had not
been seen as the first choice for
London’s specialist insurance
groups after the UK leaves the

EU, with Dublin and Luxem-
bourg thought to be more likely
homes for the industry. But
Mr Nelson said the city won on
its transport links, talent pool
and “extremely good regula-
toryreputation”.
Lex page 14
Insurers set to follow page 18

Lloyd’s of Brussels Insurancemarket
to tapnew talent poolwithEUbase

AFP

JAMES BLITZ — WHITEHALL EDITOR

A computer system acquired to collect
duties and clear imports into the UK
may not be able to handle the huge
surge inworkloadexpectedonceBritain
leaves the EU, customs authorities have
admittedtoMPs.

HM Revenue & Customs told a parlia-
mentary inquiry that the new system
needed urgent action to be ready by
March 2019, when Brexit is due to be
completed, and the chair of the probe
said confidence it would be operational
intime“hascollapsed”.

Setting up a digital customs system
has been at the heart of Whitehall’s
Brexit planning because of the fivefold
increase in declarations expected at
BritishportswhentheUKleavestheEU.

About 53 per cent of British imports
come from the EU, and do not require
checks because they arrive through the
single market and customs union. But
Theresa May announced in January that
Brexit would include departure from
both trading blocs. HMRC handles 60m
declarations a year but, once outside the
customs union, the number is expected
tohit300m.

The revelations about the system,
called Customs Declaration Service, are
likely to throw a sharper spotlight on
whether Whitehall can implement a
host of regulatory regimes — in areas
ranging from customs and immigration
to agriculture and fisheries — by the
timeBritain leavestheEU.

Problems with CDS and other projects
essential toBrexit could force London to

adjust its negotiation position with the
EU, a Whitehall official said. “If running
our own customs system is proving
much harder than we anticipated, that
ought to have an impact on how we
press forcertainoptions inBrussels.”

In a letter to Andrew Tyrie, chairman
of the Commons treasury select com-
mittee, HMRC said the timetable for
delivering CDS was “challenging but
achievable”. But, it added, CDS was “a
complex programme” that needed to be
linked to dozens of other computer sys-
tems to work properly. In November,
HMRC assigned a “green traffic light” to
CDS, indicating it would be deliveredon
time. But last month, it wrote to the
committee saying the programme had
been relegated to “amber/red,” which
means there are “major risks or issues
apparent inanumbero£eyareas”.

HMRC said last night: “[CDS] is on
track to be delivered by January 2019,
and it will be able to support frictionless
international trade once the UK leaves
the EU . . . Internal ratings are designed
to make sure that each project gets the
focus and resource it requires for suc-
cessfuldelivery.”

HMRC’s letters to the select commit-
tee, which will be published today, pro-
vide no explanation for the rating
change, but some MPs believe it was
caused by Mrs May’s unexpected deci-
sionto leavetheEUcustomsunion.
Timetable & Great Repeal Bill page 2
Scheme to import EU laws page 3
Editorial Comment & Notebook page 12
Philip Stephens & Chris Giles page 13
JPMorgan eye options page 18

HMRCwarns
customs risks
being swamped
byBrexit surge
3Confidence in IT plans ‘has collapsed’
3Fivefold rise in declarations expected

World Markets

STOCK MARKETS

Mar 31 prev %chg

S&P 500 2367.10 2368.06 -0.04

Nasdaq Composite 5918.69 5914.34 0.07

Dow Jones Ind 20689.64 20728.49 -0.19

FTSEuro�rst 300 1503.03 1500.72 0.15

Euro Stoxx 50 3495.59 3481.58 0.40

FTSE 100 7322.92 7369.52 -0.63

FTSE All-Share 3990.00 4011.01 -0.52

CAC 40 5122.51 5089.64 0.65

Xetra Dax 12312.87 12256.43 0.46

Nikkei 18909.26 19063.22 -0.81

Hang Seng 24111.59 24301.09 -0.78

FTSE All World $ 297.38 298.11 -0.24

CURRENCIES

Mar 31 prev

$ per € 1.070 1.074

$ per £ 1.251 1.249

£ per € 0.855 0.859

¥ per $ 111.430 111.295

¥ per £ 139.338 139.035

€ index 88.767 89.046

SFr per € 1.071 1.069

Mar 31 prev

€ per $ 0.935 0.932

£ per $ 0.800 0.801

€ per £ 1.169 1.164

¥ per € 119.180 119.476

£ index 77.226 76.705

$ index 104.536 104.636

SFr per £ 1.252 1.244
COMMODITIES

Mar 31 prev %chg

Oil WTI $ 50.46 50.35 0.22

Oil Brent $ 53.35 53.13 0.41

Gold $ 1244.85 1248.80 -0.32

INTEREST RATES

price yield chg

US Gov 10 yr 98.63 2.41 -0.01

UK Gov 10 yr 100.35 1.22 0.02

Ger Gov 10 yr 99.27 0.33 -0.01

Jpn Gov 10 yr 100.36 0.07 0.00

US Gov 30 yr 99.27 3.04 0.01

Ger Gov 2 yr 102.57 -0.75 0.00

price prev chg

Fed Funds E� 0.66 0.66 0.00

US 3m Bills 0.78 0.78 0.00

Euro Libor 3m -0.36 -0.36 0.00

UK 3m 0.34 0.34 0.00
Prices are latest for edition Data provided by Morningstar

ALEX BARKER — BRUSSELS
GEORGE PARKER — LONDON
STEFAN WAGSTYL — BERLIN

TheEUyesterdaytookatoughopening
stance in Brexit negotiations, rejecting
Britain’s plea for early trade talks and
explicitly giving Spain a veto over any
arrangementsthatapplytoGibraltar.

European Council president Donald
Tusk’s first draft of the guidelines,
which are an important milestone on
the road to Brexit, sought to damp Brit-
ain’s expectations by setting out a
“phased approach” to the divorce proc-
ess that prioritises progress on with-
drawal terms.

The decision to add the clause giving
Spain the right to veto any EU-UK trade
deals covering Gibraltar could make the
300-year territorial dispute between
Madrid and London an obstacle to

ambitioustradeandairlineaccessdeals.
Gibraltar yesterday hit back at the

clause, saying the territory had “shame-
fully been singled out for unfavourable
treatment by the council at the behest of
Spain”. Madrid defended the draft
clause,pointingoutthat itonlyreflected
“thetraditionalSpanishposition”.

Senior EU diplomats noted that
Mr Tusk’s text left room for negotiators
to work with in coming months. Prime
minister Theresa May’s allies insisted
that the EU negotiating stance was
largely “constructive”, with one saying it
was “within the parameters of what we
were expecting, perhaps more on the
upside”.

Britishofficialsadmittedthat theEU’s
insistence on a continuing role for the
European Court of Justice in any transi-
tiondealcouldbeproblematic.

Brussels sees little room for compro-

mise. If Britain wants to prolong its
status within the single market after
Brexit, the guidelines state it would
require “existing regulatory, budgetary,
supervisory and enforcement instru-
mentsandstructures toapply”.

Mr Tusk wants talks on future trade
to begin only once “sufficient progress”
has been made on Britain’s exit bill and
citizen rights, which Whitehall officials
believe means simultaneous talks are
possible if certainconditionsaremet.

Boris Johnson, the foreign secretary,
reassured European colleagues at a
Nato summit in Brussels that Mrs May
had not intended to “threaten” the EU
when she linked security co-operation
afterBrexitwithatradedeal.
Reports & analysis page 3
Jonathan Powell, Tim Harford &
Man in the News: David Davis page 11
Henry Mance page 12

Brussels takes tough stance onBrexit
with Spainhandedveto overGibraltar

About 2.3m people will benefit from
today’s increase in the national living
wage to £7.50 per hour. But the rise
will pile pressure on English councils,
which will have to pay care workers a
lot more. Some 43 per cent of care
sta� — amounting to 341,000 people
aged 25 and over — earn less than the
new living wage and the increase is
expected to cost councils’ care services
£360m in the coming financial year.
Analysis i PAGE 4

Living wage rise to pile
pressure on care services

SATURDAY 1 APRIL / SUNDAY 2 APRIL 2017UK £3.80; Channel Islands £3.80; Republic of Ireland €3.80

© THE FINANCIAL TIMES LTD 2017
No: 39,436 ★

Printed in London, Liverpool, Glasgow, Dublin,
Frankfurt, Brussels, Milan, Madrid, New York,
Chicago, San Francisco, Washington DC, Orlando,
Tokyo, Hong Kong, Singapore, Seoul, Dubai

Subscribe In print and online
www.ft.com/subscribenow
Tel: 0800 298 4708

For the latest news go to
www.ft.com

Censors and sensitivity
Warning: this article may be
upsetting — LIFE & ARTS


HOW DRIVERLESS
TECHNOLOGY IS
CHANGING AN
AMERICAN WAY OF LIFE

THE END
OF THE
ROAD
FT WEEKEND MAGAZINE

Escape the taper trap
How high earners can evade
a pension headache — FT MONEY

The lure of the exotic
Robin Lane Fox on the flair
of foreign flora — HOUSE & HOME

How To Spend It


Chic new lodgings
in Scotland
MAGAZINE

Art of persuasionMystery deepens
over disputed painting of JaneAusten

Austen’s descendants insist the Rice portrait depicts her as a girl — seemagazine Bridgeman Art Library

RALPH ATKINS — ZURICH
DUNCAN ROBINSON — BRUSSELS

Credit Suisse has been targeted by
sweeping tax investigations in the UK,
France and the Netherlands, setting
back Switzerland’s attempts to clean up
its imageasataxhaven.

The Swiss bank said yesterday it was
co-operating with authorities after its
offices inLondon,ParisandAmsterdam
were contacted by local officials
“concerningclient taxmatters”.

Dutch authorities said their counter-
parts in Germany were also involved,
while Australia’s revenue department
said itwas investigatingaSwissbank.

The inquiries threaten to undermine
efforts by the country’s banking sector
to overhaul business models and ensure
customers meet international tax
requirements following a US-led clamp-
down on evaders, which resulted in
billionsofdollars infines.

The probes risk sparking an interna-
tional dispute after the Swiss attorney-
general’s office expressed “astonish-
ment” that it had been left out of the
actions co-ordinated by Eurojust, the
EU’s judicial liaisonbody.

Credit Suisse, whose shares fell 1.2 per
cent yesterday, identified itself as the
subject ofinvestigations in the Nether-
lands, France and the UK. The bank said

it followed “a strategy offull client tax
compliance” but was still trying to
gather informationabouttheprobes.

HM Revenue & Customs said it had
launched a criminal investigation into
suspected tax evasion and money laun-
dering by “a global financial institution
and certain ofits employees”. The UK
tax authority added: “The international
reach of this investigation sends a clear
message that there is no hiding place for
thoseseekingtoevadetax.”

Dutch prosecutors, who initiated the
action, said they seized jewellery, paint-
ings and gold ingots as part of their
probe; while French officials said their
investigation had revealed “several
thousand” bank accounts opened in
Switzerland and not declared to French
taxauthorities.

The Swiss attorney-general’s office
said it was “astonished at the way this
operation has been organised with the
deliberate exclusion of Switzerland”. It
demanded a written explanation from
Dutchauthorities.

In 2014, Credit Suisse pleaded guilty
in the US to an “extensive and wide-
ranging conspiracy” to help clients
evadetax. Itagreedtofinesof$2.6bn.
Additional reportingbyLauraNoonan in
Dublin, Caroline Binham and Vanessa
Houlder in London, andMichael Stothard
inParis

Credit Suisse
engulfed in
fresh taxprobe
3UK, France and Netherlands swoop
3Blow for bid to clean up Swiss image

FE
B

R
U

A
RY

4
2
0
17

THE RISE OF ECO-GLAM

390_Cover_PRESS.indd 1 19/01/2017 13:57

JULY 30 2020 Section:World Time: 29/7/2020 - 18:35 User: john.conlon Page Name: WORLD1 USA, Part,Page,Edition: ASI, 2, 1

Page 8

8 ★ FINANCIAL TIMES Thursday 30 July 2020

COMPANIES & MARKETS

Mercedes Ruehl — Singapore

Megvii and SenseTime, China’s leading
artificial intelligence start-ups, are
raising money and winning overseas
contracts despite landing on a US
blacklist last year, underscoring how
Beijing’s brightest young companies
are weathering the setback.

Megvii, one of eight companies put on
the US commerce department’s entity
list nine months ago, is in talks with new
investors to raise funds after postponing
an initial public offering in Hong Kong
this year, according to two people with
knowledge of the situation.

There are internal discussions about
whether the $4bn Chinese facial
recognition start-up needs the capital
before or after a potential listing next
year, the people added.

Alibaba-backed facial recognition
software company SenseTime turned to
private investors to raise up to $1bn in
capital this year with an IPO still some
ways off, according to two other people
familiar with the matter.

Both companies declined to com-
ment. The US blacklisted Megvii and
SenseTime in October, along with voice

recognition company iFlytek and AI
unicorn Yitu, accusing the companies of
aiding the “repression, mass arbitrary
detention and high-technology surveil-
lance” in the western Chinese region of
Xinjiang.

The move by the Trump administra-
tion, whose acrimony with Beijing has
involved the technology sector, struck
at the heart of China’s burgeoning AI
industry, a key part of President Xi Jin-
ping’s “Made in China 2025” blueprint.

Megvii and SenseTime have multiple

for example, raising $1.25bn in part
to refinance debt coming due in
September.

AT&T also sold debt on Monday,
boosting the month’s total by raising
$11bn across five maturities to buy back
debt coming due in roughly the next five
years.

The new debt ranges from a $2.25bn
bond maturing in seven-and-a-half
years to a $1.5bn bond maturing in more
than 40 years.

The average yield across bonds rated
investment grade fell below 2 per cent
for the first time ever this month,
according to an index run by Ice Data
Services — and analysts are forecasting
corporate borrowing costs could decline
further.

“It’s definitely going to be slower for
the remainder of the year but compa-
nies will come to market that need to
extend their maturities,” said Monica
Erickson, head of the investment grade
corporate team at DoubleLine Capital in
Los Angeles.

John Stephens, chief financial officer
at AT&T, said on the company’s
earnings call last week that its cost of
debt is as low as he has ever seen.

contracts with Chinese companies and
cities and are some of Beijing’s brightest
prospects in the sector.

But after initially struggling with the
US blacklisting, which bars them from
buying components from American
suppliers, they have stabilised.

Megvii’s planned Hong Kong listing
was thrown off course and revenue was
hit as the company halted many opera-
tions to assess the impact.

The start-up, whose offshore backers
include Macquarie and the Abu Dhabi
Investment Authority, said it made no
revenue from projects in Xinjiang in the
first half of 2019.

Megvii’s revenue has recovered to
pre-entity list levels, according to a per-
son with knowledge of the situation. A
revived IPO, this time potentially on the
mainland’s tech-focused Shanghai Star
board, is expected in 2021.

Shenzhen-based iFlytek said in April
the entity list ban had cost it $12.7m but
net profit still rose to Rmb819m
($117m) in 2019 from the year before.

SenseTime has not publicly com-
mented on the business impact but it
operates primarily in China and has
little exposure to the US market.

Technology

US blacklisting fails to derail ambitions of
China AI start-ups Megvii and SenseTime

Joe Rennison

Global corporate bond issuance is on
course for its slowest month of the
year, slumping by half from June as
companies flush with cash from a
recent borrowing binge take stock of
the fast-evolving coronavirus crisis.

Corporate borrowers have raised
$259bn by selling bonds since the start
of July, less than half the $529bn sold last
month and the lowest total since the
end-of-year slowdown in December,
according to data from Refinitiv.

The drop has been particularly
pronounced for companies rated invest-
ment grade in the US, which have sold
$76bn of bonds this month compared
with four consecutive months above
$200bn from March to June.

The US Federal Reserve paved the
way for a record-breaking surge in cor-
porate borrowing at the end of March
when it announced sweeping measures
to support the US economy and finan-
cial markets.

Companies in dire need of money to
replace earnings lost as a result of the
pandemic rushed to issue debt. Invest-
ment grade corporate bond issuance in

Fixed income

Corporate debt issuance halves after
surge leaves borrowers flush with cash

the US this year has already surpassed
the total for the whole of 2019.

With many companies now stuffed
with cash — reducing the imminent risk
of bankruptcy — bankers and analysts
say there is less desperate need to issue
more bonds.

“We have never seen anything
like that, it was a liquidity crisis and
companies scrambled,” said Hans

Mikkelsen, a credit strategist at Bank of
America. “What has changed is that
now they have liquidity.”

Activity more recently has focused on
lower rated issuers that have struggled
to lure investor support owing to
concerns over their solvency and
some bigger borrowers moving
opportunistically to take advantage of
record-low borrowing costs to lock in
savings and push out debt maturities.

Kinder Morgan sold debt on Monday,

‘It’s definitely going to be
slower but companies will
come to market that need
to extend their maturities’

Chinese facial recognition start-up
Megvii is in talks with new investors

of new flare-ups in Covid infections
that prompt further restrictions on
movement and travel.

Mr Rawlings said cocoa demand was
unlikely to start growing again until
the 2021-22 crop year, assuming
a “complete relaxation” of social-
distancing measures.

This uncertainty was making bargain-
hunters wary, said commodity traders.
Processors have stocked up in the crisis,
raising worries that unusually big inven-
tories will continue to weigh on prices.

“The consensus among traders is that
the industry holds about 10 months’
worth of forward cover,” said Eric Sivry
at commodities broker Marex Spectron.

Producers, meanwhile, are playing a
waiting game. The Ivory Coast and
Ghana, the two biggest producer coun-
tries, normally sell their upcoming crop
ahead of the harvest starting in October
but are holding out for better prices,
according to people in the market.

The pandemic has already created
a crisis for farmers, said Nestor Yao,
president of the Capressa farmer
co-operative, which represents about

3,200 farmers in Abengourou, in
eastern Ivory Coast.

The country’s borders have been shut
for four months because of the
pandemic, keeping foreign farm
workers out — and leaving much of the
pruning and weeding work undone.

“We can’t do farm work the way it
should be done so, production will be
[affected],” said Mr Yao.

The impact on farmers is “disastrous”,
he added, affecting their ability to buy
food, house their families and pay
school fees for their children.

The fall in bean prices has also fed
worries about whether a price premium
levied on international buyers by Ivory
Coast and Ghana will actually reach the
farmers the money is supposed to
support.

In order to reduce poverty and child
labour, the two governments — which
account for more than 60 per cent of the
world’s cocoa — agreed last year to
demand a $400-per-tonne premium, to
be added on cocoa harvested from the
crop year starting this October.

Politicians called the cartel “Copec”,

reflecting the pair’s ambition to use
their market share to influence prices in
the same way as producers of crude oil.

Michiel Hendriksz, a former cocoa
executive who runs FarmStrong Foun-
dation, which works on sustainable
agriculture programmes in Ivory Coast,
said the premium was a mistake.

It has already been discounted in the
price buyers are willing to pay and is
depressing demand that has already
been hit hard by the pandemic, he said.

Despite the challenges facing the
market, betting against the crop is risky,
said traders.

“Cocoa isn’t a crop where investors
like to be short for too long,” said an
executive at a leading trading house,
speaking on condition of anonymity.
“It's a fickle crop; in the biggest produc-
ers it’s a bit of a disorganised crop,” he
added. “The supply risks are [normally]
much larger than demand risks.”

Traders are increasingly focused on
the ballot box. The Ivory Coast has an
election in October and Ghana in
December.

Cocoa prices are sensitive to any
political volatility in the region and any
sign of a disruption to supply could trig-
ger a rush among investors looking to
cover their short positions, traders said.

But the end of the year, which
includes the holiday season, will also be
a crucial test for demand.

Marcia Mogelonsky, analyst at con-
sumer data research firm Mintel, said
the “focus on emotional wellness” in
lockdown was good news for sales of
comfort food.

But with gatherings and travel still
disrupted, the upmarket segment will
continue to struggle. “A classy, fancy
tray of truffles you hand-select — that’s
not happening,” she said.

Emiko Terazono — London
Neil Munshi — Brussels

The Covid-19 crisis has taken a big bite
out of the chocolate market, causing a
slump in demand that has sent cocoa
prices sharply lower and created
“disastrous” conditions for farmers.

The New York benchmark for cocoa
beans has fallen by almost a quarter
since its February high, hitting
a 15-month low of $2,150 a tonne earlier
this month.

Though prices have recovered a little
in recent days, hedge funds have contin-
ued to ramp up their bets against the
commodity, moving into their biggest
net short position this year.

“Clearly, funds don’t believe this is the
bottom,” said Andrew Rawlings, analyst
at Rabobank.

Shifts in supply patterns are normally
the cause of fluctuations in cocoa prices.
But the virus has shifted attention to
demand as Covid lockdowns disrupted
sales of chocolate at airports, hotels,
restaurants and speciality boutiques.

As a result, global “grindings” — the
amount of cocoa processed by the
industry — fell 8.2 per cent in the
second quarter, according to data from
industry associations. That was the
largest year-on-year decline since 2014.

The world’s biggest chocolate compa-
nies reported falls in their second quar-
ter sales with Lindt, the Swiss chocola-
tier, predicting comparable sales will be
down 5 to 7 per cent for the full year.

The economic downturn is a threat to
the outlook, analysts said, as is the risk

Prices slump amid the biggest

year-on-year decrease in

processing beans since 2014

‘A classy,
fancy
tray of
truffles
you
hand-select
— that’s not
happening’

Cocoa producers
in Ghana are
holding out for
better prices
ahead of the
harvest starting
in October
Axel Fassio

Commodities. Demand test

Virus hit to chocolate sales
shakes up cocoa trading

Cocoa price melts

Source: Refinitiv

New York cocoa price ($ per tonne)

1,500

1,600

1,700

1,800

1,900

2,000

2,100

Jan 2020 Jul

Philip Stafford — London

The UK market regulator is cracking
down on brokers, saying it has seen evi-
dence that some are making “inappro-
priate” use of clients’ assets through
legal loopholes.

In a so-called “Dear CEO” letter — a
rare form of correspondence that sig-
nals concerns over industry-wide prac-
tices — the Financial Conduct Authority
gave 357 wholesale brokerages just
three weeks to attest they were abiding
by the rules.

The warning is the latest example of
scrutiny of the conduct of wholesale
brokers, which act as middlemen and
negotiate trades in equities, energy,
commodities and interest rate deriva-
tives markets, for customers such as
asset managers and wealthy individu-
als. They also carry out trades for their
own accounts.

In its letter, sent last week, the FCA
said some brokers had been inappropri-
ately using a standard legal agreement,
in which customers agree to transfer
legal ownership of collateral to their
broker for use in meeting margin calls
on trades.

The collateral is designed to be a
safety net for customers, and is
ringfenced in case the broker itself gets
into financial difficulty.

But some brokers have been holding

an “inappropriate” amount of money or
assets compared to a client’s risk. Some
brokers did not have permission from
the customer to hold these accounts,
while others were not supposed to hold
client money, the watchdog added.

“We are especially concerned about
such cases where firms lacked arrange-
ments to promptly return collateral to
their clients, or to segregate it as
required by [client asset standards],”
the regulator warned.

Simon Bird, co-founder of Objectivus
Financial Consulting, a risk and govern-
ance specialist, said that a number of
brokers had “transferred all the clients’
money to cover trades, so there’s been a
certain amount of free capital available”
for the firm.

Brokers were also “misidentifying”
some trades, the FCA’s letter said, label-
ling them as clients’ trades rather than
their own, and therefore incurring
lighter capital charges. Clients of these
brokers include investment banks and
smaller independent brokers.

Last year the FCA sent brokers
another “Dear CEO” letter warning that
they had “not kept pace” with the
tougher markets regulations of the pre-
vious five years. Moreover, there was a
“complacent attitude and resultant fail-
ure to meet expectations across all the
areas of regulation,” the letter said.

The regulator blamed the industry’s
pay and incentive schemes, which typi-
cally hand brokers cash payments for
generating revenue.

Cross asset

UK watchdog
warns over
brokers’ use
of collateral

‘We are concerned about
cases where firms lacked
arrangements to promptly
return collateral to clients’

FastFT
Our global
team gives you
market-moving
news and views,
24 hours a day
ft.com/fastft

JULY 30 2020 Section:Markets Time: 29/7/2020 - 18:38 User: stephen.smith Page Name: MARKETS1, Part,Page,Edition: USA, 8, 1

Page 9

Thursday 30 July 2020 ★ FINANCIAL TIMES 9

COMPANIES & MARKETS

L Brands led the S&P 500 gainers after
the retailer announced plans to operate
its Victoria’s Secret chain as a standalone
company in preparation for a break-up.

The company also said that second-
quarter sales had fallen less than
expected thanks to improving trends at
its speciality Bath & Body Works stores.

JPMorgan turned positive in response.
The broker said that with sales and profit
both inflecting, and with health, beauty
and home trends all underpinning long-
term growth prospects, the promise of
making L Brands more focused on Bath &
Body Works was too hard to ignore.

Tupperware was heading for its
biggest ever daily gain, up as much as
70 per cent after a restructuring during
the second quarter delivered quicker
than expected results.

Chipmaker AMD climbed after raising
its full-year revenue guidance to reflect
strong demand for PC, gaming and
datacentre products. It also flagged
helpful trends for the second half on the
back of new games console launches.

Seagate Technology was under
pressure after the data storage maker’s
annual results — and guidance for the
quarter ended September — both
disappointed. Economic uncertainty and
disruptions related to Covid-19 had hit
end-markets including video, Seagate
said. Bryce Elder

Wall Street LondonEurozone

Kering rallied after results from the
luxury goods maker helped ease worries
that Gucci, its key brand, had lost
momentum.

Second-quarter group organic sales
were down 43.7 per cent, which was
slightly ahead of the sector average,
while margins remaining unexpectedly
firm. Kering’s continued outperformance
should give investors confidence to
narrow a discount of more than 30 per
cent to rivals, said Société Générale.

Sector peer Ferragamo, the Italian
leather goods maker, climbed after saying
revenue had improved across all its
geographies in July.

Finnish drugmaker Orion was the Stoxx
Europe 600’s biggest faller on news that
a late-stage clinical trial of its
experimental motor neurone disease
treatment had shown no statistically
significant difference versus a placebo.

While investors had already viewed the
drug as high risk after it failed a mid-
stage study, the setback was likely to
push Orion into seeking acquisitions in
order to reach a 2025 sales target, said
Jefferies analysts.

Neste fell after SocGen downgraded
the Finnish fuel refinery to “hold”.

With waste supply chains still at risk of
disruption around the world from Covid-
19, Neste’s biofuels division faced possible
rising input prices, it said. Bryce Elder

HSBC gained on the back of an upgrade
to “buy” from Investec Securities.

“In the context of current geopolitical
turmoil, as well as our own longstanding
scepticism over HSBC’s ability to
(ever) deliver against management
targets, we find it hard to generate too
much enthusiasm for this call,” Investec
told clients. But with HSBC’s discount-to-
book value having fallen to a 22-year low,
the stock was worth owning for resilient
profitability and a best-in-class dividend
yield through to 2022, the broker said.

Barclays dropped after interim results
showed that its consumer lending
operations were holding back group
earnings, which had been expected to be
buoyed by the performance of its
investment banking division.

Taylor Wimpey led UK housebuilders
lower after reporting much weaker than
expected first-half margins, because of
Covid-19-related costs, and cautioning
that completion rates would remain weak
for the rest of 2020.

Smurfit Kappa rose after the paper
packaging maker reinstated its full-year
dividend with forecast-beating results.

Cineworld retreated on news that AMC,
its main rival in the US, had agreed a deal
with Universal Pictures to reduce the time
before films could be put on premium
streaming services to just three
weekends. Bryce Elder

3 Stocks edge higher ahead of Fed rate
decision
3 Dollar falls to lowest level against
peers since June 2018
3 Oil climbs after drop in US crude
inventories

The gold rally paused and the dollar
weakened ahead of a Federal Reserve
announcement yesterday in which US
policymakers were widely expected to
keep interest rates on hold.

The US Dollar index, which tracks the
greenback against a basket of its peers,
fell 0.3 per cent to its lowest level since
June 2018.

“A key driver of a weaker dollar in
coming months is likely to be negative
macro data surprises from the US,” wrote
George Saravelos, global head of FX
research at Deutsche Bank.

The US reported 1,121 coronavirus
deaths on Tuesday, taking the seven-day
average death toll above 1,000. Several
states have now reversed plans to reopen
their economies after this uptick in cases.

The flare-ups came as Republicans
clashed with Democrats over an
extension of fiscal support that would cut
enhanced unemployment benefits from
$600 a week to $200.

“Markets had assumed that the risk to
the deal was mostly to the upside,” said
analysts at Brown Brothers Harriman,
“but discussions seem to be heating up
and bogging down and so the range of
possible outcomes looks wider now.”

Gold stayed around $1,957 an ounce,
having hit an all-time peak this week.

“Gold has been driven higher by falls in
US Treasury real yields, a weak US dollar

and more dovish Fed policy,” said
Anthony Rayner, multi-asset fund
manager at Premier Miton Investors. “All
of these factors are arguably behind the
recent rise in gold as investors worry
about slowing economic activity in the
US, due to resurgent cases of Covid-19.”

Analysts at Credit Suisse expect gold
to hit $2,000 in three months and $2,050
in 12 months.

On Wall Street, the S&P 500 was up 1
per cent at lunchtime at New York with L
Brands the top performer after the owner
of Victoria’s Secret reported quarterly
sales that were better than expected.

competition — and the improved
governance and risk assessment this
will gradually bring with it.

If foreign asset managers profession-
alise China’s stock market and help its
investor base mature, this can only
strengthen the case for a diversification
strategy away from housing into stocks.

China’s stock market has long been
disparaged as a casino but the image
needs to be reconsidered. True, retail
investors still dominate the market and
underlying fundamentals such as prof-
its have a marginal influence at best on
prices. Regulators retain a tight grip on
the initial public offering process.

But change is afoot. The advance in
equities so far this year owes little to
visible support from China’s “national
team” of state-backed investment insti-
tutions. Regulators have learnt the les-
son from five years ago that interfering
with the market can backfire.

Unlike in 2015, the authorities
resisted the temptation in the first quar-
ter to suspend the market, despite the
gravity of the coronavirus crisis. Clearly,
China is at pains not to deter badly
needed flows of foreign capital.

Importantly, too, China is now
included in MSCI’s widely followed
emerging markets index. Whatever
your views on the country, it is a market
that can no longer be ignored.

Could the rally since the end of March
— in which stocks have risen by more
than one quarter — be the start of a long-
term bull market in China? This is not
currently our medium-term forecast.
Even so, investors need to recognise and
act on the fundamental changes that
have taken place over the past few years.

Diana Choyleva is chief economist at Enodo
Economics in London

Elsewhere, the continent-wide Stoxx
Europe 600 benchmark slipped 0.1 per
cent while China’s CSI 300 index of
Shanghai- and Shenzhen-listed stocks
leapt 2.4 per cent.

Oil prices rose after US crude stockpiles
fell further than forecast last week.
Refineries pumped more fuel, imports
plunged and petrol demand surged, said
the Energy Information Administration.

Brent crude, the international
benchmark, rose 1.4 per cent to $43.82 a
barrel while WTI, the US marker,
climbed 0.6 per cent to $41.28 a barrel.
Ray Douglas

What you need to know

Dollar dips to two-year low against peers
US Dollar index

Source: Refinitiv

88

90

92

94

96

98

100

102

2017 19 2018

104

The day in the markets

Markets update

US Eurozone Japan UK China Brazil
Stocks S&P 500 Eurofirst 300 Nikkei 225 FTSE100 Shanghai Comp Bovespa
Level 3244.75 1431.22 22397.11 6131.46 3294.55 105007.68
% change on day 0.82 -0.01 -1.15 0.04 2.06 0.86
Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $
Level 93.666 1.178 105.105 1.296 7.000 5.152
% change on day -0.032 0.426 0.124 0.155 -0.114 -0.394
Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond
Yield 0.578 -0.501 0.016 0.118 2.939 6.393
Basis point change on day -1.560 0.900 -0.500 1.000 1.600 -0.700
World index, Commods FTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)
Level 365.24 43.76 41.35 1940.90 23.55 2882.90
% change on day 0.53 1.16 0.73 0.22 -3.41 0.72
Yesterday's close apart from: Currencies = 16:00 GMT; S&P, Bovespa, All World, Oil = 17:00 GMT; Gold, Silver = London pm fix. Bond data supplied by Tullett Prebon.

Main equity markets

S&P 500 index Eurofirst 300 index FTSE 100 index

| | | | | | | | | | | | | | | | | | | |
May 2020 Jul

2880

3040

3200

3360

| | | | | | | | | | | | | | | | | | | |
May 2020 Jul

1360

1400

1440

1480

| | | | | | | | | | | | | | | | | | | |
May 2020 Jul

5920

6080

6240

6400

6560

Biggest movers
% US Eurozone UK

U
p

s

L Brands 33.50
Advanced Micro Devices 13.33
C.h. Robinson Worldwide 10.55
Trane 8.39
Gap (the) 8.27

Cap Gemini 6.53
Kering 3.97
Gecina 3.02
Schneider Electric 2.93
Pernod Ricard 2.66

Next 7.68
Smurfit Kappa 4.75
Burberry 3.69
Jd Sports Fashion 2.81
Hsbc Holdings 2.56

%

D
ow

ns

Seagate Technology -10.13
Automatic Data Processing -6.48
General Electric -5.30
Boeing -3.90
Netapp -3.42

Prices taken at 17:00 GMT

Saipem -9.86
Solvay -5.03
Basf -4.90
Tenaris -4.87
Santander -4.71
Based on the constituents of the FTSE Eurofirst 300 Eurozone

Taylor Wimpey -8.09
Barclays -6.11
Rolls-royce Holdings -3.62
Melrose Industries -3.43
Evraz -3.38

All data provided by Morningstar unless otherwise noted.

Diana Choyleva
Markets Insight

T
he history of China’s stock
markets is one of successive
booms that ended in tears,
most recently in 2015, when
the benchmark fell 47 per

cent in a matter of months. But evidence
is mounting that there is something new
about this latest rally, which means it
could have much further to run.

It is worth considering whether this
time really could be different. To be
sure, the upswing has echoes of the
surge and subsequent collapse in share
prices five years ago, which spooked not
only the ruling Communist party but
also global markets.

Much like in 2015, cheerleading by
state media has encouraged investors to
pile into equities, sending a clear signal
to a market already primed for gains on
the back of a surprisingly robust per-
formance during the Covid-19 lockdown.

Yet the differences are also signifi-
cant. First, although margin financing
has risen fast this year, it remains well
below 2015 levels and as a share of
overall trading in the A share market it
is at one of its lowest levels.

By the middle of 2015, regulators had
grown so concerned by the explosion in
trading with borrowed money that they
curbed the practice, pulling the rug
from under the stock market.

The authorities, for whom reducing
risk in the financial system remains a
top priority, need to be careful.

Nothing attracts money like a rising
stock market. But as long as the influx
reflects increased risk appetite and not a
surge in borrowing, Beijing has little
reason to cut it short, especially at a time
when debt-for-equity swaps have
emerged as the preferred method to
clean up bad loans.

The second big change is President Xi

China’s rally can
avoid the boom
and bust of 2015

Jinping’s determination to halt property
inflation. For more than three years, the
Communist party chief has been
intoning the mantra that homes are for
living in, not for betting on.

Mr Xi views sky-high house prices as
widening the divide between rich and
poor. He is committed to addressing the
massive increase in inequality over the
past 20 years that has made China one of
the most unbalanced countries in the
world, according to IMF data.

That is hardly a record to boast about
in the same breath as proclaiming your
pursuit of “socialism with Chinese
characteristics for a new era”.

The Chinese people are finally getting

the message that Mr Xi means business
— neither the trade war with the US nor
the economic havoc wrought by Cov-
id-19 has produced the dramatic easing
of housing policy that has typically been
part of China’s stimulus efforts.

The significance for the stock market
is that Chinese households might start
to think twice about automatically
pouring their savings into property on
the assumption that house prices will
keep rising.

It is premature to conclude that China
is on the brink of a Great Rotation from
property into equities. But it would be
unwise to rule out the possibility.

The third big difference between
2015 and 2020 is the opening up of
China’s financial markets to foreign

Margin financing is at one
of its lowest levels as a
share of overall trading in
the A share market

JULY 30 2020 Section:Markets Time: 29/7/2020 - 18:44 User: stephen.smith Page Name: MARKETS2, Part,Page,Edition: USA, 9, 1

Page 15

Thursday 30 July 2020 ★ FINANCIAL TIMES 15

disliked. ETFs were thus an investor
crutch, not a market block.

Is this use of ETFs sustainable? Sadly,
no one knows. On March 23, the Federal
Reserve took dramatic action to halt the
freeze in corporate credit, announcing
big purchases of company bonds. It is
possible that if that Fed rescue had not
occurred, the funky ETF prices might
have eventually caused those structures
to fall apart. We will never know.

But investors need to ponder three
points in the light of this saga. First, reg-
ulators are still grappling with all the
unintended consequences of the post-
2008 financial reforms.

Second, since these reforms have
changed market structures, it would be
foolish to think that past models of
liquidity provision are a good guide to
the future. The March adventure
around ETFs provided a benign sur-
prise. But there are less cheering exam-
ples to ponder: in March the US Treas-
uries market also acted extremely
strangely, because of hitherto unrecog-
nised hedge fund exposures.

Third, as market structures change,

value of their underlying assets, in the
most extreme moments of dislocation.

That seemed utterly bizarre at the
time. However, analysts have subse-
quently re-examined events with cool
heads and two curious points emerge.
These are that ETF price swings pre-
ceded other market moves, albeit in a
more extreme way. Plus, this volatility
did not occur because trading dried up;
on the contrary, daily ETF trading vol-
umes exploded, running 250 per cent
higher than before the crisis, and inves-
tor redemptions were very modest in
March compared with other asset
classes.

Thus, it seems that investors reacted
to the corporate bond market freeze by
using ETFs to hedge risks, conduct price
discovery and dump exposures they

E
ver since the 2008 financial
crisis, policymakers and pun-
dits have wondered what
would happen to the cogs of
finance in the next big global

market shock.
Now, they have a test case to dissect:

the widespread market drama that
occurred in March as Covid-19 spread
worldwide and economies began lock-
ing down. While it is still too early to
pass definitive judgment on the overall
resilience of banks and finance — since
the full tally of Covid-19 pain remains
unclear — some curious micro-lessons
are emerging that deserve more debate.

Consider fixed-income exchange
traded funds, which are financial instru-
ments designed to track an underlying
corporate bond index. Back in
2008, when worries centred on corpo-
rate credit defaults, regulators and
investors tended to focus on banks. That
was because big investment banks held
vast inventories of corporate bonds and
acted as market makers in this sector.

But the post-2008 reforms made it
much more expensive for banks to act
as market makers, so they sold down
their inventories. Many of those hold-
ings were bought by the ETF sector,
which has exploded in size since

then. “In mid-2007, broker-dealers held
$418bn in corporate and foreign bond
assets that could be used for market-
making activity, but now these holdings
account for less than $60bn,” notes
Standard and Poor’s. In contrast, ETFs’
corporate bond holdings jumped by
more than $500bn in that period.

This has generated good fees for ETF
managers and made banks more robust.
But it left policymakers worried about
market liquidity, too. Market makers
have an incentive to keep markets trad-
ing in a crisis. However, entities such as
ETFs do not, since they essentially oper-
ate on autopilot, buying and selling
bonds automatically to match an index.

Thus, regulators have fretted that the
change in ownership was creating mar-
ket “fragility”. Even in good times
“liquidity in corporate bond markets
appear[ed] less robust” than before, as a
report from the Bank for International
Settlements notes; in bad times, activity
might freeze, it was feared.

So what actually happened in the
Covid-19 market test? The Cassandras
were partly right: in early March, the
market for corporate bonds did indeed
freeze. “Issuance in primary markets
stopped, mutual funds saw sizeable out-
flows, and secondary market yield
spreads to government securities wid-
ened very rapidly,” the BIS says. Ouch.

Worse, the ETF market went haywire
— seemingly confirming the fears. Most
notably, in early March, the price of
ETFs collapsed so dramatically that the
funds lost their link to the prices of the
underlying corporate bonds. Some
traded at a 5 per cent discount to the

ETFs are the
canary in the

bond coal mine

While banks starred in the
2008 financial crisis,

exchange traded funds
matter much more now

H
ere follow some excerpts
from a speech about China
by Mike Pompeo last week.
The US secretary of state
chose as his setting Richard

Nixon’s presidential library in Califor-
nia, whether in honour or repudiation,
it was not always clear.

“The free world must triumph over
this new tyranny”; “the sweet appeal of
freedom itself”; “freedom-loving
nations of the world”; “the free world is
still winning”; “it’s time for free nations
to act”. Perhaps fearing that he had bur-
ied the lede, Mr Pompeo named the
speech itself “Communist China and the
Free World’s Future”.

Now, resist for a moment the cry of
double standards. To judge by the
administration’s foreign policy, “free”

nations include Saudi Arabia and Rus-
sia. Set aside, also, that jarring venue.
China was not free when Nixon, the dry
realist, employer of Henry Kissinger,
enlisted it as a counterweight to the
USSR. Nor did the Soviets’ unfreedom
stop him seeking a detente with them.

There is a presidential mouth in
which the “F”-word is even harder to
imagine. It just happens to belong to Mr
Pompeo’s boss. For all his animosities
with other countries, Donald Trump
tends not to mind their internal doings.
The US president regards China as a
trade malefactor and a usurper of his
own nation’s primacy. That it is also
authoritarian does not — though it is
hard to verify these things — seem to
disturb his sleep. His previous villain,
the economic rival that was 1980s
Japan, was a pacifist democracy.

It matters that Mr Trump and his sec-
retary of state have radically different
world views. The president is transac-
tional. Mr Pompeo moralises. Mr
Trump’s grievance with China stops at
economics and power politics. Mr Pom-
peo goes further and rejects its govern-
ing values. For Mr Trump, another

weakness and domestic distraction of a
boss who is doing poorly in the polls.
Authority, as Alfred Tennyson wrote,
forgets a dying king.

But Mr Pompeo’s advantage runs
deeper than that. He taps into a moral
dualism in Washington, a belief in
clearly delineated good and bad, that
survives any misadventures it might
inspire. Even the fiasco of Iraq (a war
that was sold on appeals to freedom)
only held it back for a while. It would
take an Alexis de Tocqueville, or per-
haps a Sigmund Freud, to divine where
it comes from, this craving for a black-
and-white picture of the world. Maybe a
young nation finds its sense of self in
opposition to something else.

Either way, Mr Trump’s election in
2016 was as much a rejection of this
righteous militancy as of effete “glo-
balism”. Of those two impulses, the first
has proved the harder for him to over-
come. It is as much the way of the Wash-
ington establishment as international
summitry and free-trade. Remember
that Mr Pompeo, a former intelligence
chief and congressman, a graduate of
the West Point military academy and

nation’s treatment of religious minori-
ties is by the by. For Mr Pompeo, a
former deacon, it seems personal.

Among his first acts at the state
department was to host a now annual
gathering on religious freedom. He also
set up the Commission on Unalienable
Rights. Under the president, the US-
China schism has been vicious but prac-
tical. If Mr Pompeo now sets the tone, it

promises to be a clash of belief systems.
And all the harder to finesse.

It matters, too, that Mr Pompeo seems
so ascendant. Over his tenure, the
administration’s rhetoric against China
has widened from the specificities of
trade to points of principle. Brute, com-
merce-minded nationalists, such as Rex
Tillerson, Mr Pompeo’s predecessor,
have made way. He is also helped by the

The president’s grievance
with Beijing stops at

economics. His secretary
of state rejects its values

AMERICA

Janan
Ganesh

Lanhee
Chen

T
he long-term fiscal impact
of the coronavirus-related
shutdowns in the US is only
beginning to come into
focus. A pandemic-induced

economic slowdown, coupled with tril-
lions of dollars in spending to provide
support to those affected, will push the
US national debt up to 118 per cent of
gross domestic product by 2030 and
more than 200 per cent by 2050. The
yearly budget deficit grew by $846bn
last month alone, or 100 times more
than it grew in June 2019.

Policymakers need to grapple with
the implications of these shortfalls in
the coming years. But a more immedi-
ate concern should be the impact of the
slowdown on the sustainability of the
entitlement programmes that many
Americans rely on.

Social Security retirement benefits,
disability insurance payments and
Medicare hospitalisation benefits are
disbursed from trust funds that workers
and employers have paid into. The crisis
is hastening the exhaustion of these
funds through declining revenues and
larger outlays. Trust fund revenues are
shrinking as collected payroll taxes
decrease because of lost jobs and
wages. They have also declined as fewer
Social Security beneficiaries now make
enough income to have those benefits
taxed. Finally, in a low interest-rate
environment, the bonds held by the
trust funds yield less income.

The Committee for a Responsible
Federal Budget estimates that the Hos-
pital Insurance Trust Fund will be
exhausted by 2024. Meanwhile, the
Social Security trust funds will run out
of reserves anywhere from three to nine
years sooner than expected. The Uni-
versity of Pennsylvania’s Wharton
Budget Model project estimates deple-
tion by 2032, while the Bipartisan Policy
Center concludes the funds could be
exhausted as early as 2026.

For Social Security, the measure of
inflation used to calculate yearly cost-
of-living adjustments could be changed
to the so-called “chained” consumer
price index, which takes into account
shopper substitutions more quickly.
This would address about a fifth of the
programme’s long-term shortfall by
slowing the rate of growth of bene-
fits. Chained CPI is a more accurate
measure of changes in living expenses
and was even included in President
Barack Obama’s 2014 budget.

Medicare imposes a morass of cost-
sharing requirements on beneficiaries,
based on the services provided and
whether they are offered in a physician’s
office or at a hospital. To reform the pro-
gramme, lawmakers should introduce a
single deductible and unified cost-shar-
ing requirement for all types of care,
while instituting an out-of-pocket cap to
protect poorer seniors.

Neither of these reforms alone would
address the solvency of the trust funds,
but both enjoy bipartisan support and
would be an important step towards
more far-reaching changes. Lawmakers

Once the trust funds are exhausted,
US law requires that payments to all
retirement and disability insurance
beneficiaries be cut uniformly and
across the board. There is no similar
requirement for Medicare, but Congress
would face pressure to address the
shortfall by precipitously raising taxes,
cutting benefits or both.

Because of the slowdown, entitlement
reform cannot wait any longer. The next

round of pandemic fiscal relief offers a
chance for Congress and President Don-
ald Trump to take a bipartisan step
towards saving Medicare and Social
Security. The package is not expected to
include big changes, but policymakers
should put together an initial reform,
even if it is limited, for each programme.

Coronavirus is hastening
the exhaustion of the funds

that underpin the
benefits programmes

Opinion

central banks and regulators need to
adapt. The BIS thinks the March events
show that ETF “prices are more reactive
to market developments than the prices
of the underlying bonds are, especially
at times of market stress”. Thus, it
believes that ETF “prices are probably
more suitable inputs to monitoring
efforts and to risk management models,
including those underpinning regula-
tory capital calculations, than relatively
stale bond benchmarks”.

That will not please anyone who fears
that ETF managers are already far too
influential for their own good. But the
BIS assessment seems realistic. Or to put
it another way, what the Covid-19 mar-
ket shock has shown is that while the
banks played a starring role in the previ-
ous big financial crisis, non-bank finan-
cial structures, such as ETFs, matter
much more now, and not just in the cor-
porate bond world.

That means ETFs deserve more scru-
tiny and debate — from politicians, as
well as investors.

[email protected]

Harvard Law School, is no outsider to
the system. At one point, his speech
looked back to the cold war. “And if
there is one thing I learned,” he said,
“communists almost always lie.” You
half-expect a swipe at the fluoridation of
tap water, evoking General Jack D
Ripper in Dr Strangelove. But such moral
absolutes are not rare in Washington.

The question is no longer whether the
US should be more vigilant on China
than it has been. That debate has been
settled in the affirmative, and with some
justice. The question is whether it is to
be a rift over earthly interests or stray
into first principles. The one is more
negotiable than the other.

We are used to the idea of Mr Trump
as a force to be contained by more
rational subordinates. It is the theme of
almost every insider memoir about the
administration. In his materialism,
though, his reluctance to build a foreign
policy on moral abstractions, perhaps
he is a restraining influence on them,
too. There are worse traits in a world
leader than cynicism.

[email protected]

Trump and Pompeo’s world views collide

finance

Izabella
Kaminska

US Social Security reform is urgently needed

should also include in the next Covid-19
relief package a mechanism to produce
bolder, systemic reform of Social Secu-
rity and Medicare.

One possibility is Senator Mitt Rom-
ney’s proposal to create new fiscal
reform commissions specific to each
trust fund, tasked with generating
bipartisan solutions to return them to
health. The reforms proposed by these
rescue committees would receive expe-
dited consideration in Congress.

The economic downturn created by
Covid-19 has not only made the US fiscal
condition significantly worse, but has
also brought into sharp relief the need to
strengthen the entitlement pro-
grammes that tens of millions of Ameri-
cans rely on every day. Policymakers
should not delay when it comes to
taking an important first step towards
addressing the future of these
programmes.

The writer is a Hoover Institution fellow
and directs domestic policy studies in
the public policy programme at Stanford
University

F
ormer US national security
adviser Zbigniew Brzezinski
wrote that Americans seeking
to preserve the country’s glo-
bal primacy must, as in chess,

think several moves ahead, anticipating
possible countermoves.

His advice springs to mind as tensions
between the US and China over data
security, trade and intellectual property
theft escalate. Both sides are openly
flexing their economic and military
power. But geopolitical shifts rarely
depend only upon visible leverage and
America may yet hold a trump card.

What would happen if President Don-
ald Trump took his rhetoric about
“making China pay” for Covid-19 to its
logical conclusion? Leading Republicans
like senator Lindsey Graham say the US
should consider cancelling the $1tn-plus
China holds in US Treasury obligations
to seek reparation.

The obvious critique is that America’s
credit rating would crater if it repudi-
ated some of its debts. The US depends
on external financing and cannot afford
to alienate bond buyers. Even if other
investors could be persuaded that a
select Chinese-state-only default was
justifiable, who could take over the
financing burden?

Yet, none of this renders the “make
China pay” policy dead in the water. In
chess, new context empowers previ-
ously redundant pieces. And one such
piece could turn out to be some $1tn-
plus (when compound interest is
accounted for) of yet-to-be-cancelled
pre-People’s Republic of China debt

ranging from the Hukuang Railways
Sinking Fund Gold Loan of 1911 and the
Reorganisation Gold Loan of 1913, to the
so-called Liberty Bonds of 1937.

Long forgotten, these bearer bonds —
denominated in sterling, Swiss francs,
Russian roubles, Deutsche marks or US
dollars — exist mostly in people’s private
collections or attics. The most relevant
were issued by the former Republic of
China or the preceding Imperial Chinese
state to raise money for big infrastruc-
ture projects. Some were secured
against revenues from Chinese natural
assets like salt resources.

When the People’s Republic of China
was founded in 1949, its leaders broke
with the tradition of maintaining the
debt obligations of previous regimes.
But they never formally de-recognised
the debt. The bonds instead went into
default, taking on mainly antique value.

Mitu Gulati, a professor at Duke Uni-
versity who has studied the bonds,
believes a legal argument could be made
to revive some claims. Legal clauses in
several of the old obligations suggest
that new Chinese debt cannot be issued
until old debt has been dealt with.

The 1912 and 1913 issues continued to
trade speculatively on the London Stock
Exchange until 1987, when some inves-
tor bets appeared to pay off. The UK
government under Margaret Thatcher
managed to negotiate a final settlement
that raised £20m for British holders of
the bonds at a time when China wanted
to enter the London capital markets and
there were active negotiations over the
return of Hong Kong to China.

Prof Gulati argues that in the right
diplomatic context, American holders
of old Chinese debt could argue for a
debt swap or “set off” against existing
US Treasury debt. Jonna Bianco heads
the American Bondholders Foundation,
which says it represents $1.6tn in
claims. A Trump supporter, Ms Bianco
says recent events have strengthened
her hand. The legal merit of the claims is
debatable but speculators are taking
interest. The value of historical bonds
traded on eBay and among specialist
dealers has been rising. George LaBarre,
a vintage financial paper dealer, says the
price of the 1911 Hukuang bond has
gone from $75-100 to about $450.

Are investors betting that Mr Trump
will really use the bonds to put pressure
on the Chinese government? Perhaps.
But they may also hope his rhetoric
alone will be enough to boost their
value. Stranger things have happened.

[email protected]

Antique
Chinese bonds
are now in play
among dealers

The legal merit of the
claims is debatable
but speculators are

taking interest

markets

Gillian
Tett

JULY 30 2020 Section:Features Time: 29/7/2020 - 18:23 User: alistair.hayes Page Name: COMMENT USA, Part,Page,Edition: USA, 15, 1

Page 16

16 ★ FINANCIAL TIMES Thursday 30 July 2020

CROSSWORD
No. 16,542 Set by PETO

JOTTER PAD

ACROSS
1 Case involving posh clergyman

(6)
4 Oddly pleased after end of pier

fell away (8)
10 City lacking nothing in religious

mystery (9)
11 Statute said to protect India’s

principal river (5)
12 Philosopher’s account originally

ignored for months (4)
13 Bound therefore to restrain

fellow not unknown to act hastily
(4,3,3)

15 Winds up being largely
unnecessary (7)

16 Stiff run through wooded area
(6)

19 In agreement over Conservative
leader right away (2,4)

21 Convenient to accept FBI agents’
fabrication (7)

23 Dim policeman possessing an
inborn intuitive power? Just the
opposite (10)

25 Thought of model endlessly (4)
27 Illyrian gentleman’s widow

regularly off in pursuit of a
scoundrel (5)

28 Relax after I exaggerated about
being anxious (3,2,4)

29 Former union issue? (8)
30 Fairly trivial rule breaking (6)
DOWN
1 Seeing that put in to reinforce a

window (8)
2 Call to mind extremely repetitive

prayer (9)
3 Raised section of carriage (4)

5 Cope with it somehow getting
caught in a abnormal position
(7)

6 Not stupid collecting silver now
(3,3,4)

7 Society getting Heather’s
support (5)

8 Oddly dour before return of old
queen’s governess (6)

9 Comes up again as resistance to
oath eventually mounts (6)

14 Curse ends up causing
difficulties for drivers (5,5)

17 Firm dates arranged quickly (9)
18 Ridiculous targets added to

Yeltsin’s initial plan (8)
20 Incitement to rebellion at first

dismissed as an issue (7)
21 Easily persuaded to find dossier

implicating Bill (6)
22 Talk about tailless fish (6)
24 Desperate to obtain Grieg’s

earliest lamentation for the dead
(5)

26 Wake up in prison (4)

Solution 16,541

According to Shopify, customers who
utilised its online selling technology
recorded sales 1.5 times higher in the
second quarter of 2020 than they did
in the bustling holiday quarter of 2019.
The question for companies like
Shopify, Netflix and Zoom Video, that
have all benefited from the pandemic,
is whether habits have truly shifted or
existing trends have simply been put
on an accelerated timeline.

Yesterday, Shopify announced that
the gross merchandise volume (GMV)
of goods trafficked on its website
reached $30bn in the second quarter.
That figure has doubled in a year and
now exceeds eBay.

According to data compiled by
Shopify, the company is the second-
largest ecommerce enterprise in the
world behind Amazon.

Shares of Shopify shot up more than
a tenth in response. Its market value is
$130bn, though revenue for the year
will probably be less than $3bn. Shares
are up 169 per cent this year, ahead of
Netflix at 50 per cent but below Zoom,
whose shares have risen 273 per cent.

Netflix admitted recently that it
could not keep up user growth from the
first half of 2020 since it just sped up
conversions of customers from 2021
and 2022. Shopify had declined to give
guidance as to how the rest of the year
will play out.

Online shopping still only represents
12 per cent of retail spending in the US,
according to Census Bureau data.
Unlike Netflix, which essentially is a
single product at a single price, Shopify
can sell a suite of services to merchants,
such as payments, shipping and data
analytics. Expanding all these offerings
is not cheap. Even after all that gross
merchandise volume and hitting
quarterly revenue of $714m, Shopify
managed to only hit an operating profit
of less than $300,000 due to spending
on R&D and marketing.

The world may or may not be
changing permanently, but investors
are still willing to expect little in
earnings from turbocharged growth
companies.

Shopify:
GMV OMG

retail business — which makes up
about a quarter of sales — continues to
struggle. A second wave of Covid-19
infections in Japan leaves Nomura
vulnerable to the risk of further
shutdowns. When the bank suspended
counter services at branches earlier
this year, sales of discretionary
investments and insurance products
slowed. It needs to find a way to
streamline the bank’s retail business.

Overseas outperformance means
that compensation — which rose about
a third from the previous quarter — is
likely to jump again.

Mr Okuda therefore has a
conundrum ahead of him. Nomura
must implement cost cuts in excess of
the continuing ¥140bn restructuring
plan while simultaneously sustaining
growth overseas.

revenues hit a record. Overseas income
before tax hit a new high of ¥64.2bn.

Volatility forced clients to rebalance
portfolios, boosting trading fees.
Demand for the bank’s fixed income
and US equities businesses was strong.

This is the result of a long-term
strategy. Nomura’s decade-long push
into overseas markets has allowed it to
take advantage of recent US and Asian
market strength. The largest profits
contribution came from overseas.

Shares have fallen 14 per cent this
year to trade at 0.6 times book value
but Nomura trades at a premium of
about two-thirds to local peers such as
MUFG. Any rebound in the share price
following the latest set of positive
results should be shortlived.

The bank cannot count on a repeat of
its recent good fortune. The domestic

pharmaceutical industry. Expect the
pandemic to accelerate innovation and
highlight the value of vaccination.

Nomura chief executive Kentaro
Okuda scored a lucky break. In his first
quarter since taking over the top job,
Japan’s largest investment bank has
beaten expectations.

Impressive results can partly be
attributed to Mr Okuda’s push for cost-
cutting. Mostly, however, he is reaping
the rewards of his predecessors.

Net profit more than doubled to
¥142.5bn ($1.4bn) in the three months
to July as investment banking business

Nomura:
beginner’s luck

Arms out. The UK government plans to
buy up to 60m doses of a Covid-19
vaccine from Sanofi and GSK. It also
wants to protect the health service by
inoculating millions more people
against flu. The financial rewards in
tackling coronavirus may be modest
but both companies stand to benefit
from the spotlight on immunisation.

Lockdowns hit vaccine sales of both
companies, which announced second-
quarter results yesterday. But they
should make up the lost ground. GSK
boss Emma Walmsley is within her
rights to declare she has never felt so
confident in the division’s prospects.

That said, the latest UK contract —
worth €300m-€500m, estimates Citi —
will not add much to profits. GSK
insists any returns will be ploughed
back into pandemic preparedness and
developing countries. Sanofi merely
promises to ensure affordability, but
reputational risk will keep profits
down. So will competition, if other
vaccines are successful.

The Sanofi/GSK vaccine has a better
than average chance of success. Most
potential Covid-19 vaccines rely on
untested techniques. Sanofi’s approach
is proven, as is the adjuvant — a
booster that improves the vaccine’s
effectiveness — contributed by GSK.
Even so, the Sanofi technique, which is
used in its Flublok influenza vaccine, is
a move away from growing vaccines in
chicken eggs. Instead, it inserts genetic
information for the virus into insect
cells, where it replicates, before being
harvested and purified.

That sort of innovation is paying off
for Sanofi, which makes nearly half the
world’s supply of flu shots. More
flexible manufacturing means flu
vaccines can be swiftly adapted to new
strains. It can also charge higher prices.
Every 1 per cent rise in flu jab uptake
in the US is worth $100m to Sanofi,
says Bernstein. It sees a lasting increase.

Covid-19 is likely to give a boost to
this often overlooked segment of the

Sanofi/GSK:
boosterism

A global health crisis is a good
opportunity to bury bad news. You can
use the pandemic to hide better tidings,
too, if you are Machiavellian.

Banco Santander and Barclays have
shown how to do both in a peak week
for coronavirus-inflected European
bank earnings.

They are an odd couple — a Spanish
lender with a Latin American bias and
a British bank wedded to
unfashionable investment banking.
The pair have made unexpectedly large
pandemic-related write-offs for the
first half of the year. At Santander, the
total is an incredible €19.6bn. Barclays
took a charge of £3.7bn. Shares in both
banks fell yesterday.

Similarities end there. Within
Santander’s mega writeoff lurks an
implicit admission that its UK strategy
has disappointed badly. The parent has
written down the goodwill of Santander
UK by €6.1bn. That leaves a business
valued at €8.4bn in 2017 worth about
€1bn in goodwill now.

Covid-19 cannot be solely blamed.
Santander UK, created through the
acquisition of former building societies
in the noughties, has failed to join the
top tier of the UK’s retail banking
oligopoly. It is overexposed to
mortgages. A London listing, if it ever
comes, would now be a muted affair.

To be fair, Lex likes Santander’s
exposure to erratic but vigorous Latin
America. The UK now looks like an
irrelevance. The bank’s €12.6bn in
goodwill and tax asset impairments do
not damage capital, despite propelling
Santander to a €6.4bn pre-tax loss.

A loan loss provision of €7bn is
equivalent to 1.5 per cent of the credit
portfolio on an annualised basis. That
leaves core equity tier one capital, an
important measure of financial
strength, slightly higher at 11.8 per cent.

Barclays also raised core capital. But
its virus-related writeoffs damp
exuberance over a strategy success.

Profits before provisions were up a
third at £5bn as trading surged in rates,
bonds and stocks. This makes it a good
time to take a fat loan loss provision.

Writebacks may later support
dividends. Impairments were
equivalent to 1.7 per cent of loans, even
after deducting a steep loss on a single
borrower, possibly Wirecard.

Santander and Barclays:
virus loan loss leaders

Accounting rules require bank bosses
to prophesy the impact of Covid-19. But
they are not epidemiologists.

Impairments will instead point to the
failure or success of judgments that
they can be held responsible for.

Lex on the web
For notes on today’s breaking
stories go to www.ft.com/lex

Twitter: @FTLex

UK prime minister Boris Johnson’s
anti-obesity drive may be horribly
timed — the nation’s £74bn food and
drink sector is already reeling from
lockdowns — but he has a point.

Two-thirds of adults and a third of
children in England are overweight,
according to the NHS.

The UK out-plumps the rest of
Europe. It is not just Britons: half of
all Americans are expected to be
obese by the end of the decade. The
Solactive Obesity index is up by two-
thirds since the March lockdowns,
beating MSCI’s world equities index.

There are as many ways to play the
obesity trade as there are diets. Like
faddy eating regimes, many
disappoint. Shares in WW
International, formerly Weight

Watchers, have shed gains quicker than
members and are worth one-quarter
the mid-2018 peak. Nestlé canned
Jenny Craig, a similar buddy-and-meal
supplement shakes regime, selling it in
2013 for less than the $600m it paid.

Plus-size clothing is a more
straightforward option. The UK market
alone was worth £7.5bn in 2019.

That has caught the eye of unlikely
investors, including German
broadcaster ProSiebenSat.1 Group.
Last year, it bought into privately held
plus-size label navabi.

Specialised funds prefer healthcare.
More than 8 per cent of OECD health
budgets will go towards treating the
consequences of obesity, according to
the Paris-based organisation.

The European Commission puts the

European bill at an annual €60bn.
Choice investments include pill
makers, purveyors of insulin pumps
and kidney dialysis services. The
ambitious scale of Mr Johnson’s drive
suggests hedging bets is wise.

The holy grail is a fat-melting pill.
Regulatory risk looms large. Novo
Nordisk’s Saxenda seemed a winner:
sales last year surged 47 per cent to
DKr5.68bn ($822m). But a knock-
back is on the cards in the UK, where
draft guidance suggests the NHS will
not foot the bill. Japan’s Eisai pulled
its weight management Belviq drug
from American shelves in February
after the Food and Drug
Administration flagged health risks.

Investors, like dieters, should give
magic cures a wide berth.

FT graphic Sources: NCD RisC; OECD; Refinitiv

The world is
getting fatter ...

… as governments spend
more on healthcare …
% of total healthcare expenditure
associated with overweight or obese

… and obesity
stocks outperform
Indices, rebasedPrevalence of obesity in adults* in

selected countries (%)

* Average of men and women

1980 2016

0

10

20

30

40

US 37.3

Mexico 29.6
UK 28.8
Greece 25.7

Italy 20.7

China 6.5
Ethiopia 4.6
Japan 4.4
Vietnam 2.2 0 2 4 6

Germany*

Switzerland

US*

France

Canada

China

Netherlands

Czech Republic

Australia

Brazil*

* Only refers to costs relating to those who are obese

2011 13 14 15 16 17 18 19 20

100

200

300

Solactive Obesity index*

MSCI All World index

* The Solactive Obesity index tracks the performance of
companies positioned to profit from servicing the obese

Obesity: fat returns
People the world over are becoming fatter, putting an ever bigger strain on healthcare budgets. As
governments and insurers shell out more on obesity-related conditions such as diabetes, stocks linked
to prevention and treatment are rising.

JULY 30 2020 Section:FrontBack Time: 29/7/2020 - 18:30 User: stephen.smith Page Name: 1BACK, Part,Page,Edition: ASI, 16, 1

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