Nvidia turns to insurers to offset AI risks

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0:32Okay, let's see if I remember how to do this. Good morning from the Financial Times. Today is Tuesday, September 29th, and this is your FT News Briefing. Andy Burnham takes center stage at the Labor Party Conference, and NVIDIA wants insurance companies to shoulder the risk of lending. Plus, the Falkland Islands are dealing with new pressure from Argentina. I'm Mark Filippino, and here's the news you need to start your day. Thank you.

1:30month's autumn budget was clear. It's time for fiscal discipline. And I tell you, these levels of debt, an assault on our common sense, they're an affront to our values. And that's why the prime minister and I are in lockstep, that we will meet the fiscal rules, that we will maintain control of Britain's finances. Healy did not deny yesterday that Burnham could end the pensions triple lock to help fund new social services. The triple lock determines how much pensions will be each year, it ensures they'll increase by whichever is higher, inflation, average earnings growth, or two and a half percent.

2:12NVIDIA made headlines yesterday after it launched the biggest share buyback in U.S. corporate history,$150 billion worth. Chipmaker is riding the AI wave, and as NVIDIA tries to raise money, it's also talking to insurers about ways to spread the risks of the fast-growing industry. Here to lay it out is the FT's insurance correspondent, Lee Harris. Hi, Lee. Hi, Mark. So, Lee, why is NVIDIA meeting with insurance companies? Well, NVIDIA has already been reaching out kind of to almost every corner of Wall Street in its effort to build a market for its chips and help unlock more financing for its customers.

2:51And this is kind of the next step of that. They've been meeting with insurers and looking at how to get insurance involved in backstopping this new market. So what kind of proposals are on the table? Well, it seems like talks are still fairly early stage. But one idea that they've been discussing is focused on losses on loans to cloud computing companies in case the clouds default. The idea is that chips are an emerging asset class and there are cloud companies that have been pledging NVIDIA's chips as really valuable collateral against their debt. But there's a risk that a couple years from now, these companies may not be able to resell the chips at expected prices and repay their lenders.

3:40So it's possible that insurance could be used to kind of protect against that risk of a fallen value in the chips. Now, NVIDIA has said that it's, quote, AI infrastructure is an investable asset class because it's uniquely productive, durable and fungible, end quote. How is the insurance industry reacting to this, Lee? I think one interesting signal is that there are insurance startups popping up, offering what they're calling residual value insurance, which they're marketing as a product that will protect big chip buyers against the risk that in a couple of years, the value of their chips has fallen or has fallen more than expected.

4:22But the more conventional players definitely want a way in. The problem is the global insurance industry, while it's large, is kind of dwarfed by the size of AI investment. So many big traditional insurance companies are just totally full up on the amount of risk exposure they can take to AI companies. I think they're just waiting to see whether a market actually develops. Leet, this is really interesting given the timing. Just yesterday, NVIDIA announced it's launching the biggest share buyback in U.S. corporate history. What does this move toward insurance tell us about the state of AI, given how well NVIDIA is doing right now?

5:02Well, with any new market, it makes sense that participants in the market would buy, say, property insurance. What's interesting here is that NVIDIA seems to be exploring how insurance could support these new complex financing packages to underpin demand for its chips. And that's a little more unconventional. I mean, chips are this new asset class, and NVIDIA could be using insurance to syndicate or spread the risk of a fall in value in its chips to different market participants, say hedge funds, in one of the structures that we heard about. That was surprising, and it goes way beyond just buying a property insurance policy on the risk that a data center gets hit.

5:47It's much more complex financial engineering. And I think we don't yet know what that market would look like. We'll see if it gains any traction. That's the FT's Lee Harris in London. Thanks, Lee. Thanks.

6:05The yield on the 10-year Treasury bond is at its highest level since 2007. Meanwhile, the price of West Texas intermediate crude has spiked this year due to the war in Iran. Now, if you've noticed that things between oil prices and bond yields have gotten a little cozy lately, that's because they have. The two have their tightest correlation in four decades. Here to explain is the FT's Emily Herbert. Hi, Emily. Hi, Mark. Okay, so what's going on here? Yeah, so the correlation between the two of those things picked up when the war in the Middle East began and the Strait of Hormuz was originally closed.

6:39And so in September, it's actually reached a peak, which is very close to a kind of record high. So basically, as oil has moved up and down, treasury yields are also moving up and down in a very, very tight relationship. Why is it significant? Yeah, this is really important. I mean, treasury yields tell us how much it costs for the US government to borrow money, but it also has a massive impact on how much it costs for other governments to borrow money, for individuals to borrow money and companies. It's a really important financial asset. and the fact that it's moving around so closely with oil is a shift from the normal pattern where the things that normally move treasury yields would be things like inflation data, economic growth data, central bank decisions and central bank commentary and the fact that it's so closely tied to oil now means that all these news developments we're getting from the US and from Iran they are driving the market for one of what is really the most important assets in financial markets.

7:37So central banks all over the world have told us that they're looking very closely at what's happening in the Straits of Hormuz and that if energy prices go up, that will push inflation up and they will have to raise interest rates. Emily, one of the key things that we've been talking about here is that bonds have been considered a safe haven asset for a very long time, but now they're tracking one of the most volatile assets in the world. What does this tell us more broadly about the global financial system and how markets work? Yeah, this has been quite an important shift in the market this year.

8:07So in general, investors treat bonds as a safe asset because in times of economic downturn, you would expect bonds to rally. But when the shock is inflationary, which this oil price shock is, bonds don't protect you in that time of higher inflation. People are basically having to look to much more kind of specific parts of the market or much more kind of niche financial instruments really to find protection for their portfolio. So a few investors say that, you know, they are using kind of like hedge fund strategies or things that are less correlated with drivers like oil to try and get a bit of a buffer in their portfolio.

8:43But it's basically much harder. You don't have that kind of easy access to a safe asset in your portfolio anymore. Emily Herbert covers markets for the FT. Thanks so much, Emily. Thank you.

8:59The Falkland Islands are gearing up to open their first commercial oil field, and that's attracting even more negative attention from its neighbor, Argentina. The islands have been under sanctions from Buenos Aires for years, and now Argentina's president, Javier Malay, is piling on even more. The FT's Kira Nugent recently visited the islands to tell us about the situation there. Hi, Kira. Hi, Mark. So why is Argentina so upset about this oil field? Give us some of the history here. So Argentina has claimed the Falkland Islands, which it calls the Malvinas, since the 1830s. And the UK has controlled them since that time.

9:35And the Falklands have known that they've had offshore oil resources for decades, but they're only now gearing up to put them into commercial production for the first time in 2028. And so for Argentina, that's like the first time that it's resources that it views as belonging to Buenos Aires are being taken out of the ground. And they say that that violates a UN resolution issued as part of the sovereignty dispute between the UK and Argentina. So for the islands, it's going to be fairly transformative for the economy. It's expected to triple GDP at the peak. But yeah, for Argentina, it's not a good development.

10:07So Kira, I mentioned earlier the sanctions that Argentina has been putting on the Falkland islands. Can you explain what that has meant for the people there? Yeah. So Argentina has basically no commercial relationship with the islands. And for the archipelago in the South Atlantic, that means that they have only one shipping link to Uruguay, one commercial flight to Chile. They have a limited list of suppliers who are willing to work with them because of fear of angering Argentina. So goods are very expensive on the islands. Projects can be very slow and costly. And then on top of all of that, Malay is now toughening sanctions on the oil industry and other natural resources industries.

10:48The new sanctions regime has a pretty vast web of targets because it also includes suppliers of companies that operate there and potentially also the fishing industry, which makes up 60 % of the Falklands GDP. And he's even launching criminal charges against the owners and directors of the oil project that is due to start in 2028. Yeah, Kira. And on top of that economic pressure, Millay said yesterday that he would launch international arbitration against the UK in two weeks, unless it takes steps to stop the oil project. Now, there's also some potential geopolitical pressure from the US here.

11:26President Donald Trump has suggested that the US might change its neutral position on who controls the islands. What could that mean for the Falklands? So the U.S. generally doesn't take a position on the sovereignty dispute between the U.K. and Argentina, although it in practice recognizes de facto British control of the islands. And Trump has been asked about this several times in the last few weeks by reporters because there was a leaked State Department memo earlier this year that suggested Washington might consider changing that position to put pressure on the U.K. in kind of some policy disputes around NATO spending and the Iran war.

12:00And Trump has said, you know, yes, I'm considering reviewing the position and the UK hasn't been a very good friend to me. And the UK isn't the country it once was when in 1982 defended the islands from Argentina's invasion. And all of this has just kind of suggested that Trump could do something in favor of his close ally, Javier Malay, when it comes to the islands, which, you know, has not been very well viewed in the islands. Yeah, we should note that the U.S. State Department did not respond to a request for comment. But going back to these new sanctions for Malay, what do they mean for the islands going forward?

12:35I mean, so it's not really clear how much leverage Malay has because Argentina has already been sanctioning and kind of icing out the Falklands for years. But if Malay were to really follow through on all of the full possibilities of this law, it could potentially raise costs for businesses, delay or disrupt the oil project. Although the project owners have said that that won't happen. The economy will face more challenges, but it won't be devastating. But this definitely worsens the relationship between the UK and Argentina. And it really prevents kind of any hope of a process that might one day normalize relations between Argentina and the islands, which for the islanders will be quite disappointing.

13:14Yeah, it seems like it. Kira Nugent is the FT Southern Cone correspondent based in Buenos Aires. Thanks, Kira. Thanks, Mark.

13:26Before we go, Japan's in a bad romance with the labor market, and one business is calling on Lady Gaga to attract workers. The chain convenience store Family Mart recruited the pop star for its latest commercial.

13:43In the ad, Lady Gaga says, why not work at Family Mart in Japanese as she struts down an aisle restocking shelves? Japanese convenience stores have been struggling to hire part-time staff recently. The combination of 24-7 operations, low wages, and grueling work isn't that appealing to job seekers in a shrinking workforce.

14:07You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

14:31The next five podcast is all about AI sovereignty. Stefan Israel at AWS joins me. Digital borders shall not become digital worlds which are not interconnected. As does Catherine DiLorenzo at A &O Sherman. It looked like a race to write the rulebook and not just a race to build the most powerful technology. And Ali Houston at McKinsey. Sovereign deep tankers, data centers, engineering, and AI talent in the country. Listen to The Next Five wherever you get your podcasts. Enjoy. Decisions made in Washington can affect your portfolio every day. But what policy changes should investors be watching?

15:09Washington Wise is an original podcast from Charles Schwab that It unpacks the stories making news in Washington right now and how they may affect your finances and portfolio. Listen at schwapp.com slash Washington Wise.