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Market Viewpoints

"When plunder becomes a way of life, men create for themselves a legal system that authorizes it and a moral code that glorifies it."

Modern banking was born in the Middle Ages in Florence, Italy. Florentine banks lent money to kings, emperors and popes. However, the current state of Italy’s banking system is a long way from its successful past and it is teetering on the brink of disaster. Italy’s banks hold bad debt to the tune of €360 billion, or 20% of the country’s GDP. So far, Italy’s efforts to reform its banks have been half­hearted and severely underfunded. Now PM Matteo Renzi wants to “bail out” the Italian banks using Italian taxpayer’s money. But the “bail out” falls foul of EU’s 2014 post­crisis “bail­in” rules for bank rescues which require bank bondholders to take haircuts on bank losses before taxpayers do. Renzi can ill­afford to “bail­in” pensioners holding their savings in Italian bank bonds. Therefore, a solution to the Italian banking crisis is a matter of political will, which in turn revolves around the German stance. I expect the austere Germans to “give into” Italian demands, if only to stave off a “systemic crisis” in the Eurozone. It’s too early to say how the EU­UK Brexit negotiations will go. The EU’s single market aims to guarantee the free movement of goods, capital, services and people among the EU’s 28 member states and German Chancellor Angela Merkel has so far indicated that she is not willing to negotiate concessions with this principle. However, in diplomacy everything is up for negotiation if conditions demand. A long delay in agreeing the terms of a EU­UK trade deal is going to be costly for both sides. I am hopeful good sense will prevail and a mutually acceptable solution will be found. I have now pushed out my US interest rate hike expectation from September to October and I still maintain that upside to equities is limited and one is better off buying on dips rather than chasing rallies.

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