The fallout of Nvidia’s spying scandal

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0:32Good morning from the Financial Times. Today is Tuesday, November 10th, and this is your FT News Briefing. A Chinese spy scandal is rocking NVIDIA. We'll see. Was Jensen Huang just incredibly naive or was there something more at play? The market is looking for alternatives to risky tech stocks. I think there's a bit of a fear in the market about what comes next in the AI trade. Plus, Britain's defense secretary exclusively tells the FT that he wants the UK to have direct talks with Russia. I'm Mark Filippino, and here's the news you need to start your day.

1:18The fallout continues for Jensen Huang. The NVIDIA CEO had an affair with a woman the US government believes is a Chinese spy. She's also an executive at a company that's a customer of NVIDIA. The chip giant's shares took a beating yesterday. They fell sharply and closed down a little bit more than 4 % on the back of the reports. This raises questions about U.S. national security, especially since Huang is close with President Donald Trump. Here to talk us through this is the FT's U.S.-China correspondent, Dimitri Sevastopoulos, who we chatted to before the news broke that the FBI was, quote, looking into Huang.

1:53Hi, Dimitri. Hey, Mark. So you broke this story, an incredible story here. What do we know about how U.S. national security officials have handled the situation with Huang, Trump, and this alleged Chinese spy? Well, so we don't know exactly when the U.S. intelligence community started to monitor Alice Huang, the woman that we believe worked for the MSS, the Chinese Security Intelligence Agency. But what we do know is that in May, just before Donald Trump made a trip to Beijing to meet Xi Jinping, a U.S. government highly classified memo that had intelligence from the U.S. intelligence community said that Jensen Huang was having an affair with Alice Huang.

2:35That was then briefed to the president and a few other senior American government officials. And that, I think, is the first time that President Trump knew about it. But what we don't know, as I said earlier, is it's possible that they were monitoring Alice Huang and Jensen for much longer than that. So I mentioned that he's close to Trump, you know, what has Trump had to say in light of these allegations? And what do people close to the president have to say? Well, Trump was asked about the allegations on Sunday after Jensen Huang had admitted to the affair. And he basically defended him as an honorable man who had been very important for the AI industry in America.

3:11And when he was asked if he regretted not acting on the intelligence that he was provided in either late April or early May. He said, no, I don't think so. He's an honorable guy. He probably has an excuse for it. But I think what you don't see in Trump's comments is the level of frustration in the U.S. national security establishment at Jensen Huang and at NVIDIA, because they believe his constant lobbying of the administration of the president himself to sell advanced chips to China is undermining American national security. And so beneath the surface, there is sometimes anger at Jensen Huang and at the company as well.

3:53What did NVIDIA have to say about the whole national security concern part of this? Well, Jensen Huang came out and apologized to his employees and his family on Sunday. And at the same time, NVIDIA said his board would open an investigation. But in the statement they put out, they basically said that there were no national security risks that people should be worried about. But frankly, you can't know that until you've done an investigation. NVIDIA doesn't know what the U.S. government and the U.S. intelligence agencies know. So we don't know what happened exactly. We don't know if Jensen Huang knew that she was a Chinese spy.

4:34We don't know if he passed any information to her or any of those things. And I think, you know, over the coming weeks and months, there will be a slew of investigations and more information will come out. And we'll see, you know, was Jensen Huang just incredibly naive or was there something more at play? Okay, so given that Trump has defended Huang publicly, but national security officials privately seem worried about this situation, do we think that this revelation will change the way the Trump administration deals with NVIDIA chips going to China moving forward? It's difficult to know because while many people think of Donald Trump as a hawk, he's a hawk on trade and economic issues.

5:13He has not been a hawk on national security. And over the past two years, his administration has done almost nothing in terms of putting new export controls on the sale of American technology to China. I think where you will see something happening is on Capitol Hill, there's going to be more support for various bills that are being debated right now. that would make it harder for NVIDIA to export technology to China. Because of the Democrats' big win in the midterms last week? Given the Democrats' victory, for sure. But also, you know, Republicans have been very frustrated at the lack of export controls.

5:49But they haven't really said as much publicly because they didn't want to go against Trump. Given that Trump took a shellicking in the midterms and Republicans are starting to speak out about him in different ways, I think you'll see Republicans and Democrats come together and push for tougher controls. Dimitri Sevastopoulos, the FT's U.S.-China correspondent. Thanks so much, Dimitri. Thanks, Mark.

6:15Now, despite NVIDIA's troubles, other U.S. stocks are recovering a bit. Falling oil prices helped the NASDAQ 100 close up nearly 3.5 % yesterday. That means the tech-heavy benchmark recovered more than half its losses from last week's intense sell-off. Now, despite that recovery, investors' worries about tech stocks have been on the up for weeks. So they're piling into sectors like consumer staples, healthcare, and utilities in something that's called defensive stocks. No, not defense stocks, defensive stocks, because they have reliable revenues even in a market downturn. The FT's Emily Herbert has more.

6:55A lot of investors have described this to me as quite a violent rotation within the stock market. So what's been happening is that some of the tech and AI stocks, which had been doing so well for most of this year and the past few years, struggled a bit in October and sold off very sharply last week, as we know. And at the same time, these more defensive sectors have been doing much better. So people are piling into these stocks that tend to do well, even if the rest of the market is not doing so well. I think there's a bit of a fear in the market about what comes next in the AI trade. And most importantly, I think in October, people were starting to get worried that all of the spending that's going into the AI infrastructure build out is not necessarily going to translate into the return on investment that they may be expected.

7:42And if that's the case, it could really send the market lower and also hit the economy because AI has become so important. Emily says it's unclear whether this is a short lived thing or if it'll be more of a lasting trend for investors. I spoke to a few people yesterday who were saying that, you know, this is actually looking a bit overdone now and maybe the defensive sectors have actually gone further than they maybe should have done. But other people were kind of pointing to the fact that earnings growth for the tech sector is expected to slow down a bit next year. Not to say that it will be slow or indeed small earnings growth, but maybe that it can't quite keep up the pace that it has for the last couple of years.

8:21And so in that environment, quite a few people that I've been speaking to in the market think that actually maybe some of these defensive stocks which have lagged the market for the past couple of years when everyone's been so focused on tech might actually have a bit of a sustained outperformance at this point. That's Emily Herbert. She covers markets for the FT.

8:45Russia wants to split Ukraine in two. That's what President Volodymyr Zelensky claimed during a recent call with European Commission President Ursula von der Leyen. He expects Russia to launch sustained attacks on bridges across the Dnepro River. The worry comes as meetings start today between officials from the U.S., EU, Russia, and Ukraine. The U.K. won't be there. And UK Defense Secretary Wes Streeting is worried about the lack of direct contact between British and Russian military leaders. I do think there is always a risk of miscalculation, and that's why having that direct communication is important.

9:21At the same time, I mean, there is some audacity on the part of Putin to say that he doesn't want war with Europe at the same time as he's waging one. That's what he told the FT's Lucy Fisher in an interview. She joins me now to talk about it. Hi, Lucy. Hi, Mark. Lucy, where are Streeting's concerns about the lack of communication channels coming from? I think there are two key things behind this intervention by West Streeting. The first is that we have actually seen a couple of potential near misses in recent months. One involved a Russian warship firing salvos in the direction of a British yacht in the channel this summer.

9:59That was swiftly followed by a Russian warplane flying allegedly dangerously close to a Royal Navy aircraft carrier. And that has really focused attention on the UK side of how easy it could be for an unintended escalation to occur. And the other point is that we've seen other European allies begin to step up their communications with Moscow. So, for example, in September, Germany's foreign minister met with his Russian counterpart, French President Emmanuel Macron. He spoke to Vladimir Putin himself in July last year for the first time in three years. So it just feels like the UK is becoming a little bit of an outlier compared to European allies just to avoid the risk of miscalculation, leading to some kind of unwanted escalation on either side.

10:50So Lucy, the US, Russia and Ukraine are all meeting in Abu Dhabi today as part of trilateral talks. Germany has also said that it will attend. Is this the kind of thing that streeting would want the UK to be a part of? Well, absolutely. And of course, the UK has been wanting to be part of major talks like this on Ukraine in terms of what's going on in the Middle East. But I think what streeting is particularly talking about is the importance of military to military level back channels to make sure that we understand what Russia's up to, they understand what we're up to, to communicate doctrine around escalation.

11:26Because, you know, when you're talking about the UK and Russia, you're talking about two nuclear powers. Is this a departure from the UK's usual position? Well, in fact, it is a stepping up and it represents West Street and going public about something that's been bubbling up behind the scenes for some time. In fact, two successive chief of the defense staff on the UK side have attempted to reach out to their Russian counterparts, seeking to have a conversation, and they've been rebuffed in recent years. So this concern has been bubbling up, and now the UK defense secretary has decided to go public, making clear how concerned they are about it.

12:06Lucy, how would the UK go about starting this direct line of communication, and do we know if the Russians would be receptive to it? The mood music so far is that the Russians are not receptive to it. And I've had Whitehall officials pointing out to me that, you know, the UK has not allowed this sort of vacuum in back channels to assist through want of trying. London prides itself on having been a real champion within Europe for supporting Ukraine since Russia's full-scale invasion in 2022. and therefore, as a result of that, has particular antipathy with Russia, which probably explains why there's been this frosty silence that's really taken hold between the two nations.

12:47Lucy Fisher is the FT's Whitehall editor. You can hear her entire interview with West Streeting in Thursday's edition of the Political Fix podcast. Thank you so much, Lucy. Thanks, Mark.

13:03While we're talking about the war in Ukraine, you may remember last month that there were some unexplained signal failures on Elon Musk's Starlink systems. That disrupted Ukraine's communications on the front line and made military missions more difficult. Because of that, BT is postponing the launch of its partnership with Starlink. The British Telecom Company's CEO, Alison Kirkby, told the FT the company won't move forward until the noise has died down over the incident. Kirkby said BT was, quote, cautious on how Starlink might be viewed at the moment. If the partnership does launch, BT will use Starlink satellites to provide internet to customers in areas that aren't covered by its fiber broadband network.

13:43Now, it's unclear what exactly caused the outage in Ukraine. Musk said that the equipment was owned and controlled by the U.S. government, and the U.S. government has denied restricting the service.

13:58U.S. Defense Secretary Pete Hegseth will defend his record at the Pentagon today. It comes just a day after the lower chamber of U.S. Congress moved to impeach him. A Republican lawmaker filed articles of impeachment yesterday that accused Hegseth of abusing his power with how he handled the U.S.-Iran war. Hegseth has been battling for his job since Republicans lost their majorities in Congress in last week's midterm elections. An impeachment vote in the House of Representatives could happen as early as this week, but Hegseth won't be removed from office unless the Senate convicts him too. And that is much harder to do.

14:32The new Democratic majorities in Congress do not take effect until January.

14:41You 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 news from the Financial Times.

15:30We'll see you next time. scores the right way. Everybody wins. Get started at VantageScore.com. The new episode of The Next 5 podcast is all about sovereignty, data, and control. Charlie Giancarlo at Everpure joins me. You always get a very embarrassed response if you ask them if they know where all their data is. As does Professor Sana Karaghani. There isn't any modern AI system that's entirely sovereign. And Claire Schramm-Fergus at Lloyd's Banking group. We really need to design for safety rather than bolting it on at the end. Listen to The Next Five wherever you get your podcasts. Enjoy.