Top News

• UN Tribunal Rebuffs China’s Claims

The biggest test of U.S. power and leadership since the Cold War arguably starts today. A United Nations tribunal in The Hague ruled that China’s claim to most of the South China Sea, backed by the deployment of powerful weaponry in recent months, has no legal basis. The tribunal upheld a complaint brought in 2013 by the Philippines, one of five governments that dispute Beijing’s claim to most of its waters. International law is now clearly at odds with the policy of one of the permanent members of the UN’s Security Council, in an area of crucial importance to the world economy (unlike, say, Crimea in 2014, but more like Iraq in 2002-3). It’s also clearly at odds with U.S. policy on upholding the freedom of navigation, and creates obvious risks for countries to whom the U.S. is bound as an ally, even if those risks may take some time to crystallize. You all remember that scene in Jurassic Park when Samuel L. Jackson tries to reboot the electric security fences. We won’t reproduce the language in this, a family-friendly newsletter, but the sentiment is to the point.   Fortune

• Stocks Sail Blithely On

Ah well, at least the stock market isn't afraid. The S&P 500 closed at a new record high Monday and is set to open again higher Tuesday after solid gains in some overseas markets overnight. Goldman Sachs isn’t convinced, though. It’s warned investors that they may be placing too much hope in central banks’ willingness to keep monetary policy loose in the wake of the Brexit shock. Against that, there are some solid reasons for stocks to be doing well: the economy and wages are growing, albeit moderately, and record low returns on bonds are chasing money into equities, making it easier to sustain historically high price-earnings ratios. At company level, Alcoa kicked off earnings seasons with a 10% drop in earnings due to weaker aluminum prices, but its shares still rose 3.8% as the market had feared a bigger drop. Fortune, Fortune, WSJ, subscription required

• Theresa Will

As one Twitter wag observed yesterday, most shows get a bit stale as they get older, but series 309 of ‘The United Kingdom’ has been a real barn-burner so far. Theresa May will be appointed Prime Minister later today after her last rival for the Conservative Party leadership, Andrea Leadsom, unexpectedly pulled out, after some ill-judged comments to the media over the weekend. Sterling has risen over two cents against the dollar and ‘safe haven’ assets are in retreat for now, but May (a Brexit agnostic at best) insisted she will deliver the referendum mandate, so the ultimate cause of recent volatility is still as valid as ever. Moreover, a general election now seems likely, in order to ensure that May can govern with a clear mandate from the country. Of more concern for business may be the distinctly interventionist note she struck in a keynote speech yesterday. Fortune

• The SEC Investigates Tesla

The Securities and Exchanges Commission is looking at whether Tesla Motors broke securities law by failing to tell investors about the fatal crash on May 7 involving its autopilot software in a timely manner, according to The Wall Street Journal. Tesla’s founder and CEO Elon Musk has been scathing about suggestions, first aired by Fortune, that it would have been more appropriate to disclose the news before the company pitched a $2 billion stock offering to investors on May 18. Musk told the WSJ he didn’t know at the time of the offering that the crash had involved the driving assistant software. Musk argues that as the news had no lasting impact on the share price, it wasn’t ‘material’ for the company’s shareholders. The SEC’s inquiry is in a very early stage and may not lead to any enforcement action, according to the WSJ’s source. Fortune

Around the Water Cooler

• Burberry’s CEO & CFO Check Out

It looks like spring was one disappointing quarter too many for Burberry CEO Christopher Bailey and his team. The company said Monday he’ll step down next year to focus again on design (he’s been chief creative officer as well as CEO for the last two years). Burberry, like many of its rivals,  is struggling  to adapt to the suppression of conspicuous consumption in China. Annual profits fell 10% last year, and the outlook for the current year is little better. Bailey will be succeeded by Marco Gobbetti,  currently head of Celine, one of LVMH’s brands. Julie Brown will replace Carol Fairweather as CFO. Investors dealt Bailey one last indignity yesterday, pushing the company’s shares up 4%. They’re up nearly 20% from their lows earlier in the spring, although much of that is only reflecting sterling weakness since the referendum.  Fortune

• Gagging Gretchen

The air of mystery thickens around Gretchen Carlson’s pursuit of redress for alleged sexual harassment. Carlson sued Fox News CEO Roger Ailes personally last week, but not the company itself, in what appears to be a move to get round a clause in her contract with Fox that forces all such claims to be held in a confidential arbitration tribunal. Ailes’ lawyers have removed the case to a federal court in Newark, asking it to dismiss it as an illegitimate attempt to avoid contractual obligations. The federal court has to decide whether the removal was proper or not. Either way, the attempt by the powerful head of a media company--whose TV stations regularly air sordid accusations about others--to sweep the allegations against himself out of a public courtroom and under the rug of strictly confidential arbitration, is eye-catching, to say the least. Fortune

• HSBC Was Indeed Too Big to Jail

A House Committee report said that U.K. Treasury chief George Osborne intervened personally to stop the Department of Justice from pressing criminal charges against HSBC in 2012. Osborne’s intervention, along with similar pressure from the U.K.’s then regulator, the Financial Services Authority, led Attorney-General Eric Holder to overrule the advice of his own prosecutors and not push for criminal action. HSBC was ultimately fined $1.9 billion for laundering money for Mexican drug cartels. Had HSBC been convicted, it would almost certainly have lost its license to clear U.S. dollar transactions, which Osborne argued would have threatened financial stability in both Europe and Asia. Global regulators have since imposed extra capital charges on “systemically important financial institutions”, in an effort to reduce their size and remove such obstacles to prosecuting them.  Partly as a result of that, the DoJ was able to suspend the clearing license of BNP Paribas in 2014 without risking a systemic failure.  FT, metered access

• UFC – Under New Ownership

Talent agency WME/IMG announced an agreement to buy UFC, the mixed martial arts powerhouse beloved of millennials, which recently completed its 200th flagship event. No financial terms were disclosed, but sources familiar with the deal put the price-tag at around $4 billion. Michael Dell will also become a part owner of the company, indirectly. Two investment affiliates of the computer company CEO are providing preferred equity. The deal will also include unspecified debt financing. Private equity firms Silver Lake Partners and Kohlberg Kravis Roberts & Co. are both putting money into the deal and getting minority states in the company in the form of common stock, along with some governance rights. UFC President Dana White will stay in his current position. Fortune