| Europe threatens fines and merger bans for Chinese state firms. Vaccine diplomacy reveals its potential to backfire. A glimpse inside the hottest battery maker on the market. Here's what you need to know to start your day. India's neighbors are increasingly looking to China to fill the vaccine gap as New Delhi battles a devastating Covid-19 wave at home. In a blow to India's vaccine diplomacy efforts, China's Foreign Minister Wang Yi told his counterparts from Afghanistan, Bangladesh, Nepal, Pakistan and Sri Lanka on Tuesday that Beijing is willing to provide them with supplies. Under mounting criticism for dominating resources, U.S. President Joe Biden said he intends to send vaccines to India, but did not specify timing. The moves show how vaccine nationalism has the potential to backfire, prolonging the global pandemic. Stockpiling has left supplies running short in places like India, where the virus has run wild. Some scientists have linked the nation of 1.3 billion people's second wave to a more virulent strain. Asia stocks are set for a muted open as investors consider a raft of earnings from U.S. technology heavyweights. The dollar rose with Treasury yields. Futures were flat in Japan and rose in Australia and Hong Kong. The Nasdaq 100 dropped for the first time in three sessions, weighed down by declines in tech heavyweights including Tesla and Microsoft. Alphabet shares rallied in postmarket trade on stronger-than-expected quarterly sales. The S&P 500 Index closed little changed after swinging between gains and losses throughout the day. Bonds declined, with benchmark 10-year Treasury yields advancing back above 1.6% as the Federal Reserve holds its policy meeting. The European Commission is seeking powers to levy fines or block deals by foreign state-owned companies in a thinly veiled response to the growing economic threat posed by China. The proposed new rules, obtained by Bloomberg, don't mention China directly but try to answer complaints from European businesses that the nation's firms get support they can't match. Chinese business groups have already complained about the plans, which will need support from EU governments before they become final. The move adds to signs of increasing protectionism in Europe amid the steepest recession in almost a century. Meanwhile, European nations are looking to create their own "national champions." Nomura suspended a group of senior executives at its investment bank and replaced a top risk official as it reels from billions of dollars of losses on trades with Archegos Capital Management. Japan's biggest brokerage, which lost some $2.9 billion on its dealings with the obscure investment firm, has also hired external lawyers to conduct a "comprehensive, impartial review" and appointed a new head of its U.S. subsidiary earlier this week. Meanwhile Swiss financial services giants UBS and Credit Suisse have shaken up their in-house legal and compliance staffs following the Archegos implosion. Columnist Eliza Martinuzzi says UBS investors deserve more of an explanation on what went wrong. The hottest battery-maker on the market is QuantumScape, with recent valuations as high as $20 billion. The battery industry's combination of hype and mystery is intoxicating for short sellers: Just shy of two weeks ago, activist firm Scorpion Capital called the company a "scam." Here's what CEO Jagdeep Singh has to say about the difficulty of innovating in battery materials and the challenge of dealing with a short-seller attack while maintaining investor trust. Find out more about the hidden science making batteries better, cheaper and everywhere. What We've Been ReadingThis is what's caught our eye over the past 24 hours: And finally, here's what Tracy's interested in todayIt's the 10th anniversary of "Margin Call" and yesterday I hosted a live chat with its director, J.C. Chandor, as well as Citigroup strategist Matt King. The film traces a blow-up at a big bank that's reminiscent of what happened in the 2008 subprime crisis. King famously penned a research note just before the collapse of Lehman Brothers, arguing that the big problem for U.S. banks was short-term funding secured by subprime and other collateral. In "Margin Call," the bank's senior executives don't realize they're sitting on a powder keg until a junior risk manager stumbles on the numbers by chance. That scenario always seemed a little far-fetched to me, but King brought up some anecdotes from 2008 that showed just how much senior leaders seemed to be unaware of the scale of the problem they faced. As he put it: "I myself remember having a conversation with desk heads in early 2008 on CDOs of asset-backed securities, and they were being relatively incredulous at the idea that if the junior tranches went, the whole structure was likely to go (I actually wrote another research piece that hardly anyone remembers!)" So how much has changed on Wall Street in the past decade? We recently saw banks handle another — albeit much smaller — blow-up in the form of Archegos. There were huge losses from that but no broader contagion, a testament to post-crisis regulation on capital and leverage. Is the system safer? King argues that there are some things that give him pause in the current environment, notably the March 2020 drama in the world's biggest funding market: "More subtly but just as importantly, what the periodic bouts of illiquidity in Treasuries are suggestive of is investor herding. The real recipe for a liquid and stable market is a heterogeneous market: Buyers and sellers, bottom-up investors and top-down investors, mark-to-market investors and buy-and-hold investors. Somehow what we seem to have done post-2008 is to take a whole load of steps, which are individually designed to make the system safer, but collectively have killed off that heterogeneity and made for one-sided markets. The bottom-up, value-based, non-mark-to-market investor — they've been killed off by a decade of quantitative easing making everything more expensive and by regulators demanding everyone take a risk-based approach to capital. That gives you a market in which investors get herded into a broad-based reach for yield that they don't really believe in. And that gives you those pockets of illiquidity: We don't get one and two-standard-deviation movements any more — we either get zero or we get 16."
That's an important point and it's where the lessons of Margin Call still ring true. You can follow Tracy Alloway on Twitter at @tracyalloway. | 
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