Green screen in Europe? Not due to Greece: Nautilus Invest

Excerpts from Midcap Radar on CNBC-TV18 Watch the full show » ALSO READ See what other FIIs are saying about the markets See what other experts are saying about markets See what Udayan Mukherjee is saying about the markets

Left directionless after Greek leaders failed to come together and put up a bailout package, European markets may be seen opening lower in trade today.

Even though the risk-on sentiment continues, signs of volatility picking up are growing. Markets are now taking cues from positive economic numbers from the US and negative newsflow emerging from the Euro region.

Bruno Verstrate of Nautilus Invest tells CNBC-TV18 that the green seen across the screen is not due to investors betting on a resolution on Greek debt.

The ECB will be holding its monthly policy meet tomorrow ahead of the next three-year LTRO (long-term refinancing operation) at the end of the month. While Greece might take its own time to reach an amicable debt deal, Verstrate says investors should not overestimate the impact of this liquidity on bond markets. "They expect 1 trillion euro to be borrowed by banks and be put at work," he adds.

Below is an edited transcript of his interview. Watch the accompanying video for more.

Q: There is a lot of green on the screen. The markets are betting big on some resolution coming from Greece. Is there a possibility that things may come unstuck?

A: I don't think that the market is betting on it. Basically on the French side, what they do see is that the back stop on a systematic crisis has been provided by the ECB via the LTROs and that's the relief that the market has and that keeps it rallying. At the same time you have another asset class which seems to become more risky which is the sovereign debt.

I am not talking about the southern countries but I am talking about Germany and the safe bonds have been yielding so little that there is a lot of potential in stocks that give better dividends. That's what the market seems to be focusing on at the moment knowing that the Greek problem is not solved yet, knowing that it could go to Portugal as the next victim so to speak but the market seems to be quite relaxed about the Greek issue.

Q: Another huge bout of liquidity is likely to come from the ECB by the end of the month. Tomorrow Mervyn King might similarly add another USD 80 billion in terms of bond buying. Is there a sense that Greece could take its own time to come to a decision but because of this liquidity another quantum leap in risk asset classes is possible?

A: I think it will although what one should not overestimate is the impact on the bond market which was rather limited compared to what one expects today. They expect 1 trillion euro to be borrowed by banks and be put at work. The consequence of the first tranche was that the short end of the yield curve was impacted by it and not too long and even the three-year as one was expecting.

The impact is rather limited, it goes on the short end of the curve and it's a very temporary solution. What is important in the end is how much of that money would flow into the economy that will cause growth and that's really what Europe needs at the moment.

Of course the yields of some countries such as Portugal, Spain and Italy need to come down knowing that there are so much emissions and rollovers coming on their bonds. In the first place one should really look at how much of the contagion is taking place in Portugal. That will show the effectiveness of it and if that contagion can be held under control then the equity markets will continue to rally.