Coup in Turkey Repulsed, Risk-Appetites Return

The US dollar and the yen are trading heavy, while risk assets, including
emerging markets, and the Turkish lira, have jumped. 
Sterling is the
strongest of the majors.  It is up about 0.5%, helped by the
opportunity of GBP23.4 bln foreign direct investment and comments from a
hawkish member of the MPC suggesting not everyone is onboard necessarily for a rate cut next month.  

Softbank has offered for UK’s ARM.  Last week a Chinese company
offered a little less than one billion pounds for Odeon & UCI
Cinemas.  Sterling’s sharp decline since the referendum has apparently
exposed some investment opportunities at ostensibly fire sale

On one hand, direct investment helps fund the current account
  On the other hand, it is not necessarily the same as
the demand for sterling.  The sterling needed for direct investment could
already be accumulated through retained
local earnings, for example.  Even if a company needs to secure the
sterling, there are two ways.  Sterling can be bought, or it can be borrowed
The advantage of borrowing is that the corporate takes on a sterling liability
offsetting the new sterling asset acquired.  This currency match may be desired to reduce risk.  

The news stream is subdued. 
Japan’s markets were closed for Ocean
Day.   The MSCI Asia-Pacific Index gained 0.2% to extend its streak to the
sixth session.   Of note, Chinese equities bucked the trend, and the major
indices were off 0.3%-0.5%.  The MSCI Emerging Markets equity index is
flat after rallying the past seven sessions.     Although the
Turkish lira is 2% higher, recovering ~70% of its coup-inspired losses, Turkish
stocks are among the worst performers today, off
more than 4.5%.  

Erdogan was democratically elected, and this is important. 
However, many fears that the failed coup is leading a strengthening of his
autocratic practices.   Erdogan will use the coup to purge enemies
and rivals.  There are reports of mass
detention of the military and judiciary.   Troubling, the failed coup
may weaken democratic and secular institutions more than a successful

News of limited price pressures
weighed on the New Zealand dollar.
  The market appears to be pricing
in around a 70% chance of a rate cut at the August 10 RBNZ meeting.  
Consumer prices rose 0.4% in Q2 and the same rate on a year-over-year
basis.  Both measures were on the soft side of expectations.  
After the yen, the Kiwi is the heaviest of the majors, but it is off
marginally.  The takeaway is that is
underperforming the other dollar bloc currencies, both of which are up about

The UK Rightmove house price index fell 0.9% in July after a 0.8% rise in
.  It is one of the first glimpses into the economy since the
referendum.  To address this dearth, Markit has announced it will provide
a one-off flash reading of the UK service and manufacturing PMIs at the end of
the week.  Like the eurozone’s flash due out the same day, it will include
around 70% of the responses.  

The Sunday Telegraph reports that the Italian government has named a US
bank to work on plans to establish a “bad bank” to buy the
non-performing loans that plague the banking system. 
The report
mentions purchases at 20% of face value, which in aggregate what is thought to
be around market value.  The rub is that the loans are being carried at
closer to twice this, meaning that such sales would be associated with significant losses.  

The press report sketches a plan by which 10
bln euros of public money would be levered to buy 50 bln euros (notional value)
of bad loans.
It matters which classification of bad loans is bought, but if the riskiest ones are bought,
this could be a substantial reduction, but does not look large enough to fully address the problem.  

It is a bit of a chicken-and-egg story.  Italian banks have been hurt by the lack of economic growth, and
growth is curtailed by the fact that
Italian banks have made practically no new net loans in years. Even if all the
bad loans from the Italian banking system can be
overnight, and the banks miraculously recapitalized, the
problems of weak domestic growth, the challenges to the business model,
(over-banked, narrow profit margins,
especially in the environment of negative interest rates)  would continue
to plague the banking system. 

In the big picture, the bad bank is the second leg of what is emerging as
a new attempt to address Italian banks, with an eye toward next week EBA/ECB
stress test. 
Several Italian banks failed the last stress test a
couple of years ago. The other leg of the new effort is a fund for
recapitalizing the banks.    Italian banks shares began firmer but have lost the momentum as midday
approached.  The FTSE Italian bank index was up four of last week’s five
sessions six of the last seven sessions coming into

 The dollar is mostly within the pre-weekend ranges.  The North American calendar is light.  There is nothing over the next week or so that will dilute the sense that the US economy gained momentum at the end of Q2.  The US-German two-year interest rate differential is near 133 bp, which is a 10 bp widening over the past two weeks.    US bond yields are edging higher today, while European bonds are bid. 



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