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Jul 25, 2012, 04.52 PM IST | Source: CNBC-TV18

European markets: Sustainable recovery unlikely, says NAB

A sustainable recovery in the European markets looks unlikely, says Nick Parsons of National Australia Bank. "For that to happen, you need not just an improvement in risk appetite, but you also need some signs of improved economic activity and a better outlook for corporate earnings. At the moment, those last two are very much absent," he adds.

A sustainable recovery in the European markets looks unlikely, says Nick Parsons of National Australia Bank.  "For that to happen, you need not just an improvement in risk appetite, but you also need some signs of improved economic activity and a better outlook for corporate earnings. At the moment, those last two are very much absent. They are just simply not there," he adds.

Below is the edited transcript of his interview on CNBC-TV18.

Q: Some news is hitting the wires with respect to EU approving the recapitalisation plan for Spanish Banks. This is exactly what the EU summit was all about. But despite similar news coming in two weeks back the borrowing costs are high, what have you made of the recapitalisation of Spanish banks and the next step?

A: The recapitalisation was agreed at the EU summit. But markets have been generally impatient and they are expecting immediate implementation of these agreements. So, that impatience was shown with further increase in bond yields and further lows for the euro.

I think we are just getting to the point where we are starting to see reappraisal. We also had comments from Nowotny, Austrian member on the ECB. Nowotny this morning was saying that he would personally support a banking license for the ESM. That would allow the bailout mechanism to leverage up the funds available for rescue. Markets have just taken that as a sign that perhaps we are now seeing some more concrete action. So, things are looking a little better in mid-morning in the London session than they did when we very first walked through the door.

Q: For the last 19-20 weeks, the ECB had shown no hint of buying bonds, despite the bond yields surging in Spain and Italy. But now that you spoken about some talk of this ECB rescue fund etc, do you think there will be a recovery in global markets or is it just going to be a short-term rebound, after which there will be another sell-off?

A: I think a sustainable recovery looks unlikely. For that to happen, you need not just an improvement in risk appetite, but you also need some signs of improved economic activity and a better outlook for corporate earnings. At the moment, those last two are very much absent. They are just simply not there.

This morning, in the UK, the GDP in the second quarter fell. That was three times worse then all of us were looking for, absolutely dreadful set of numbers. So, with these comments from the ECB, EU, talk around the ESM and talk around restarting the Securities Market Purchase Programme, the best we can hope from that is that we might get a little bit of stability. But I think the hopes for an immediate turnaround and saying that yes, this is really the time to pile into markets, I think they are still a bit far-fetched at the moment. It doesn’t look time for that sort of optimism.

Q: We got the UK GDP numbers and that was a bit disappointing for Q2. Market seemed to have shrugged that off.

A: Markets did shrug it off. The equity markets are becoming more global now and reason maybe a UK index that investors really use, the FTSE, the FTSE 100, the main equity benchmark is stuffed full of global companies that happen to have a London listing. But where we can see a market reaction is in the currency. The pound has fallen against the dollar. The pound has even fallen against the euro. When any currency falls against the euro in this market, it really is generally a sign of trouble.

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