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VCZS news

Highlights:

  • Terrorist attacks in France and the failed military coup in Turkey
  • European bank problems

Changes in selected stock indices and commodities:

Note: USA: S&P 500, Europe: BE 500 inx, Japan: Nikkei 225, Brazil: Ibovespa, Russia: RTS, India: NIFTY, China: Shanghai Composite, Africa+Middle East: GCC 200, South Africa: JSE TOP 40, Australia: ASX 300, Gold and Oil

Commentary:

Very decent gains were made by equity markets in July, despite some negative news. Tensions continue to rise in Europe as more terrorist attacks occurred in France. Then in Turkey, part of the army attempted a coup, which was quickly put down. President Erdogan is now using the situation to his advantage, seeking to consolidate his own power even further by carrying out purges in the army and the civil service.

In other negative news, the expected massive support for the Japanese economy has been postponed at a time of unprecedented quantitative easing, when it was even expected that the Bank of Japan would buy Japanese government bonds directly. So far, the move has not been approved and investors will have to wait until at least September when Japan’s central bankers meet again. In August, Japanese equities can be expected to undergo a decline, precisely because of unfulfilled strong buyers’ expectations.

At the end of July, the results of the stress tests of European banks were published, and on the whole they turned out rather favourably. However, Italy’s Banca Monte dei Paschi di Siena and Ireland’s Allied Irish Banks failed the test, with a CET1 capital adequacy ratio below 4.5%. On the other hand, the Nordic banks performed best in the stress tests, while the UK’s Barclays and France’s Société Générale were surprisingly worse.

Despite the rather negative news, equity markets rose in July mainly in response to the overly strong June sell-off caused by the Brexit shock. US stock markets, which logically did not suffer as much from the British referendum, even surpassed their all-time highs in July and reached new record highs.

The Brazilian stock market saw very strong growth as President Rousseff’s scandal slowly fades and the country looks ahead to the Olympic Games, which should boost consumption and attract tourists. In the opposite direction was oil, which corrected previous gains and is also being impacted by Brexit-related concerns and expectations of lower product growth in Europe. Given that the oil price is heavily dependent on the economic cycle, this weakening is understandable.

The story of the world’s oldest bank:

The Italian bank Monte dei Paschi di Siena was founded in 1472 and is the oldest bank in the world. The bank’s immediate predecessor was founded by the Sienese municipal authorities (under the name Monte di Pieta) twenty years before Christopher Columbus began his search for a route to India. It survived several state formations, profited from the French occupation at the turn of the 18th and 19th centuries and the unification of Italy, and endured both world wars. Throughout, the bank was closely connected to the city, financing the development of the road network in Tuscany and supporting local universities.

In the new millennium, the bank did not perform well and decided to solve the problems by acquiring the financial institution Antonveneta. It bought the bank at great cost in 2007 from Spain’s Santander for EUR 9 billion. The takeover propelled what was by then a regional institution into the top three Italian banking players.

The absurdly expensive expansion, coupled with a rising share of non-performing loans, further deteriorated the bank’s financial health. The current bill for mismanagement has now reached almost €50 billion, but under new European rules, shareholders and creditors must first contribute to the recovery of a bank in trouble. Since the bank’s creditors are also Italian households (many Italians hold Italian bank bonds), Italy now wants to break the new rule and help the bank. Therefore, the Italian government is negotiating with the ECB the conditions under which the aid could be implemented.

The term “too big to fail” has come to mean that the big banks are too big to be allowed to fail by the state. It seems that the same will apply to Monte dei Paschi di Siena, which will be rescued by the Italian State (i.e. the Italian taxpayer).

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