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Clashes in Egypt, but investors remain upbeat

Supporters of Mohammed Morsi gather in Cairo
Getty Images
Supporters of Mohammed Morsi gather in Cairo

Scuffles broke out in Cairo on Tuesday as supporters of ousted president Mohamed Morsi clashed with security forces and opponents in the city center.

Preliminary reports indicated that tear gas was fired in the vicinity of the Ministry of Interior, near the Egyptian Stock Exchange.

The prolonged political deadlock has fueled concerns over a forceful intervention by security forces. So far, however, the relative restraint is keeping investors upbeat.

(Read more: Looking for a good investment? Consider Egypt: finance minister)

"Cooler heads have prevailed since the removal by force would, we think, likely lead to both high casualties and a significant loss of credibility by the authorities," Angus Blair, founder of the Signet Institute, a Cairo-based think tank, told CNBC.

A flurry of diplomatic activity in recent weeks to crack Egypt's political deadlock has so far failed to produce an agreement. The government has repeatedly asked protestors to go home, and classified ongoing sit-ins as a threat to national security. In the past 48 hours, there has been a visible increase in the presence of both police and military forces across the capital.

The military has also stepped up its campaign against militants in the Sinai Peninsula, home to the Suez Canal. On Tuesday morning, the Israeli military confirmed it had intercepted a missile over Eilat, a resort town on the border with Egypt. Shipping traffic has been unaffected.

But investors appear to be finding renewed confidence in the country's economic prospects. "By ignoring the sit-ins, the government can get on and run the economy," Blair added.

(Read more: Violence doesn't shake up Egyptian stock market)

The benchmark stock index EGX30 has gained 5.89 percent in the last eight trading sessions, boosted in part by the arrival of a $12 billion aid package from the oil-rich Gulf States.

A mediation initiative by the Grand Imam of Al-Azhar, Egypt's top religious authority, has effectively been rejected by the Muslim Brotherhood. It comes on the heels of visits by diplomatic contingents from the U.S., the European Union, Germany, the United Arab Emirates and Qatar.

Supporters of the ousted president, who is being kept at an undisclosed location, are demanding his reinstatement. Further complicating ongoing efforts to broker a face-saving deal are trials for senior Muslim Brotherhood officials, slated for late August. The U.S. on Monday urged a halt to all "politically motivated arrests and detentions," but stopped short of mentioning Morsi.

(Read more: Dozens shot dead; US tells Egypt to pull 'back from the brink')

Bond yields fall

Meanwhile, improved appetite for Egyptian assets was also reflected in falling government borrowing costs. Yields on 3-year Egyptian treasury bonds fell over one percentage point at an auction on Monday, to reach 13.76 percent.

Net international reserves in the Arab World's most populous nation, which were running precariously low, are already being filled again.

A statement by the Central Bank of Egypt [LINK TO: http://www.cbe.org.eg/English/] last week showed reserves reached $18.88 billion at the end of July, up from $14.9 billion in June. This rise took reserves to their highest level since November 2011. The Egyptian pound has strengthened as a result, rising to 6.99 against the U.S. dollar.

(Watch now: Clashes in Cairo leave many dead)

Apart from the political impasse, other indicators may keep the positive momentum in check.

"Leaving aside the drop in debt servicing costs and improved liquidity, little has changed," HSBC analysts said in a research note on Tuesday. "Subsidy spending, which has tripled since 2005, will remain a heavy drain on resources, especially as a weaker exchange rate pushes up import costs."