Pentagon nears blacklisting Anthropic amid AI limits dispute

Good morning. Here’s what happened overnight and what you need to know today.

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1.

Terms of use: US Defence Secretary Pete Hegseth is “close” to designating the AI company a “supply chain risk” and cancelling the Department of War’s (DoW) USD200 million ($282.20 million) contract with the Claude model maker, according to sources cited by Axios. The Pentagon and Anthropic have been locked in contentious discussions as Anthropic wants to ensure its tools are not used to surveil Americans or to develop weapons that fire without human involvement, while the DoW argues the terms are unduly restrictive. In negotiations with Anthropic and other AI labs, Pentagon officials insist that the military is able to use their tools for “all lawful purposes”, Axios reports. Anthropic’s Claude AI model is the only model currently being used in US military classified systems. Should the Pentagon designate Anthropic a supply chain risk, a penalty typically reserved for foreign adversaries, any company wanting to do business with the US military would have to cut ties with the AI lab, a senior Pentagon official told the masthead. (Axios)(Capital Brief)

2.

Contentious repatriation: Thirty-four Australians were released from a camp holding families of suspected Islamic State militants in northern Syria — before being returned to the detention centre due to “technical reasons,” two sources told Reuters. Co-director of the Al Roj camp in north-eastern Syria, Hukmiya Mohamed, told the news agency the Australians had been handed to members of their families who had come to Syria for their release on Monday morning. They were put on small buses with a military escort to travel to Damascus, from where they had planned onward travel to Australia. Sources told Reuters the families were returned to the camp shortly after leaving due to “technical problems” between the families and the Damascus government. A camp official told the SMH the group’s travel had been paused for an unspecified period of time. Responding to news that the group was attempting to return to Australia, the Australian government said in a statement that it “is not and will not repatriate people from Syria.” (Reuters)(SMH)(ABC)(AFR)(The Australian)(Capital Brief)

3.

Deal progress: Australia and the EU appear closer than ever to striking a major trade agreement, after Trade Minister Don Farrell returned from two days of talks in Europe “confident” a deal will be struck. Capital Brief recently revealed the EU had contacted Canberra to revive stalled negotiations over a free trade agreement (FTA), which broke down in 2023. Farrell then skipped Senate estimates to jet for talks in Brussels last week, in a sign there was growing confidence that a deal could be struck. “I’m pleased that we have made progress,” Farrell said on departure. But the key sticking point remains the level of access Australian red meat producers will gain to Europe’s 450 million-person market. Any final deal is likely to include concessions from Australia over its luxury car tax, which Germany in particular views as a hindrance to car manufacturers, like BMW. (Capital Brief)

4.

Treasury trims: Fintech insiders say they are not alarmed by Treasury’s move to slash the team responsible for implementing the sector’s cherished consumer data right (CDR) reforms, arguing that internal moves in the government department signal progress after years of inaction. An industry source told Capital Brief that there used to be five or six divisions at Treasury working on CDR before 2022 which have been pared back to around two divisions. The source said many of the staff members who were cut from the team were moved to focus on scam prevention work unit and financial literacy. On Monday, Capital Brief reported that Treasury had cut 50% of its CDR team since November 2022, with Assistant Treasurer Daniel Mulino insisting that the unit still has enough resources to deliver on the years-long project. CDR intermediary Adatree co-founder Jill Berry said: “If anything, I assume that they’re going to be reallocating resources into digital ID, which is very much CDR adjacent.” (Capital Brief)

5.

Alibaba update: Alibaba unveiled a major upgrade to its flagship AI model, Qwen3.5, as Chinese tech groups race to get ahead of a much-anticipated release from DeepSeek around the first anniversary of its R1 model that upended global AI conventions last year. Alibaba said the latest iteration of Qwen is designed to support AI agent tasks, can understand text, photo and video inputs and analyse videos as long as two hours. The company said Qwen3.5 was 60% cheaper to use and eight times better at processing large workloads than its immediate predecessor, and built for the “agentic AI era”. The upgrade comes as local rivals including ByteDance, Zhipu and Minimax release competing models leading up to the Lunar New Year. ByteDance on Saturday released Doubao 2.0, and Alibaba, Tencent and Baidu also plan to deploy a combined 4.5 billion yuan ($921 million) in cash incentives to attract users during the holiday, according to Bloomberg. Separately, Elon Musk’s SpaceX and wholly owned subsidiary xAI are reportedly competing in a secretive USD100 million Pentagon challenge to develop voice-controlled, autonomous drone swarming technology, Bloomberg reported. (Bloomberg)(Reuters)(Alibaba)

6.

Capital reset: The US Fed is edging closer to unveiling a long-awaited bank capital proposal tied to Basel III that would alter how US lenders treat residential mortgage exposure. US lenders are poised to face new mortgage-loan requirements under the Fed’s proposal. Fed Vice Chair for Supervision Michelle Bowman said in prepared remarks at an American Bankers Association event in Florida that measures related to residential real estate would look at increasing the risk sensitivity of capital requirements for mortgage loans held on bank balance sheets, including by using loan-to-value ratios instead of a single risk weight. Regulators would also seek comment on risk weights linked to certain mortgages, she said. Meanwhile, regulators in Japan are investigating suspected insider trading at Mizuho Securities and Morgan Stanley revamped its European investment banking leadership. In Japan, Mizuho Securities said it is cooperating fully with an investigation by the Securities and Exchange Surveillance Commission after Nikkei reported that staff in its investment banking division are suspected of insider trading and that regulators raided its Tokyo headquarters in late January. Separately, Morgan Stanley appointed William Bertagna deputy head of investment banking for Europe, the Middle East and Africa, replacing Martin Grebner.(Bloomberg)(Reuters)(Nikkei)

7.

Thin trade: Investors kept global markets largely steady in thin holiday trade, as Friday’s benign US inflation data reinforced expectations the Federal Reserve will cut interest rates this year. With US markets closed for Presidents’ Day and mainland China among Asian markets shut for Lunar New Year, trading volumes were muted. Futures on the S&P 500 were flat and Nasdaq 100 futures were 0.2% lower, while Europe’s Stoxx 600 gained 0.1%. Traders are fully pricing a July rate cut, with futures implying a 68% chance of a June cut and 62 basis points of easing this year, according to Reuters. In Japan, GDP grew an annualised 0.2% in the fourth quarter, far below the 1.6% forecast. The Nikkei closed 0.2% lower. Meanwhile, fund managers are taking the most bearish stance on the dollar in more than a decade, with a Bank of America survey published Friday showing positioning is the most negative since at least 2012, the FT reported. The dollar is down 1.3% this year against a basket of peers, on top of a 9% drop in 2025, and bets against the currency have outstripped positive wagers so far this year. (Bloomberg)(Reuters)(WSJ)(FT)

8.

Sixteen shield: Germany is poised to introduce age restrictions on social media and Britain could also move as early as this year to ban access for minors and tighten oversight of AI chatbots, reports say after Australia became the first country in the world to block access to social media for under-16s. Germany’s co-governing Social Democrats on Monday threw their weight behind a proposal from Chancellor Friedrich Merz’s conservatives to limit services for those under the age of 16. The SPD proposal would ban social media for under-14s and require platforms to provide suitable content for those between 14 and 16. It would also change the rules governing how platforms provide content to adults, so algorithmic recommendations are activated only upon explicit request. The German cabinet is likely to adopt a joint proposal later this year, Bloomberg reported. Meanwhile, Britain could introduce an Australian-style ban on social media for children under 16 this year and close a loophole that left some AI chatbots outside safety rules, Reuters reported. Prime Minister Keir Starmer’s government last month launched a consultation and is working to amend legislation so changes could take effect within months of the consultation concluding, technology minister Liz Kendall told British media, adding that proposals would be set out before June. (Bloomberg)(Reuters)