Be wary chasing mkts on likely surge in liquidity: Expert

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In an interview with CNBC-TV18, Nick Parsons, head of research (UK & Europe) at National Australia Bank, spoke about the drama unfolding out of the euro-zone and his outlook.

Below is an edited transcript of his interview on CNBC-TV18. Also watch the accompanying video.

Q: Expectations are running pretty high that perhaps today Greece will sign the deal. What are you hearing over there and where do you think the markets are headed?

A: It does seem that Greece is finally going to put the signatures to the 50 page document that largely meets all the demands of the credit to nation. That is certainly a positive, but on top of that positive-and let's be clear about this it's hardly a surprise-it's been one of the like Groundhog Day waiting for Greece every day for the last 10 days to finally put the signatures to the document.

On top of that we of course have got the ECB meeting this afternoon and this is now 100 days that Mr Draghi has been as ECB president. He has succeeded where his predecessors failed in allowing the peripheral bond spreads to narrow. We have got a much calmer tone at the short end of the bond market.

The ECB is doing its credit easing and I think it's that factor, which is largely driving the better performance of equities this morning. It's looking forward to the ECB and it's seeing a proactive President who is trying to do something.

Q: You are voicing the exact same sentiment that many experts have pointed out. The market is more focused on the next gush of liquidity from the ECB rather than what's happening with Greece. Do you believe that if we do continue to get this liquidity from the ECB's LTRO, there maybe another big wave of risky assets or liking risky assets from hereon?

A: I don't think it will be a big wave. Let's just wind the clock back to the December 21 of last year. Market expectations then centered on liquidity injection of somewhere between 100-200 billion euros. In the event we got 489 billion euros. So it was considerably more than expected. It was a positive surprise and that underpinned the market.

We are now at a stage where the second long term refinancing operation (LTRO), which we know is going to be on February 28 or 29, the market is already talking in terms of possibly an injection up to 1 trillion euros. It's very clear that expectations have shifted and I once saw a definition of happiness, which said that happiness is reality minus expectations, when expectations are quite low it's relatively easy to have a positive surprise.

But when expectations are already so high, I would be very wary of chasing the markets from current level on the basis of the liquidity that's going to come in. I don't think only that is going to give us another leg higher. It might be sufficient to limit the extent of any selloffs from here.

Q: Are we likely to hear specifics of any of quantitative easing or LTRO from the ECB today itself?

A: No, we are not. The ECB has pre-announced in December that there would be two operations. We have had the first one. The second one is scheduled for the February 28 and 29. What we do know is that subject to eligibility criteria that all bids will be met in full. So, essentially, it is for the market to determine how much it wants.

It's not that the ECB is going to set a number of 500-600 or 700 billion euros. The ECB has said that it will be unlimited and allotted in full at 1% subject to meeting eligibility criteria.