Outcome of G20 meet as vital as Greek polls: Nick Parsons

Nick Parsons of National Australia Bank explains to CNBC-TV18 that the rally in the markets was due to investors closing in their short positions which have reached their risk limits. Parsons adds that any durable rally would depend on the outcome of the meeting of the G20 in Mexico.

Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video Q: It would be pointless to ask what you expect from the Greek elections because that's anybody's best guess. But if the uncertainty on Greece continues come Monday morning, how would you approach the global equity markets?
A: If there is no decision then I think investors are going to once again flee risk, equities and again start to sell currencies and position themselves more defensively.
So, I don't see a great deal of upside on Monday morning. I do hear reports about the risks being finely balanced that and if New Democracy was to win, there would be a rally in the euro and in risk.
I think it's much more asymmetric and the downside risks are probably much greater than the possibility of an upside. But you certainly can’t read too much into the day’s price-action.
What’s happening today is merely investors who have been short, closing out those positions and trying to run neutral books as much as they can ahead of Sunday's election. Q: So, what is feeding the love for risk in the markets? Is it the expectation of liquidity priming from central banks or is it the expectation that things will not work out in terms of a dire consequence in Greece and the euro zone will still see more stability?
A: Investors are cheered by the potential liquidity infusion and in that respect the announcement from the Bank of England this morning is very important. The Bank of England is essentially extending its credit-easing operations. Its standing ready to provide almost unlimited quantities of money against collateral into the sterling money market.
This is encouraging investors to believe ahead of the G20 meeting next week in Mexico, that there is in fact some kind of internationally coordinated approach to these problems of liquidity.
The problem is that liquidity will not itself help insolvency and if there are institutions which are technically insolvent then of course they would not have the assets to place with central banks in order to be able to access this liquidity.
So, it's helpful at the margin and encouraging people to believe that there is an internationally coordinated response. But once again I fear that there is scope for disappointment once we look at the fine details and the implications of these types of moves.
_PAGEBREAK_ Q: The rally has been short, but sharp for most markets in the course of the last 10 days. Tactically, then would you look to sell into any further strength we see or because of all these events we have been talking about, do you think there is more give or more stay for this market rally?
A: Trying to pick the top of a squeeze is by definition almost impossible. When people are buying not because they want to, but because they have to, they do so almost irrespective of price.
I don’t feel that anyone is buying equities with a smile on their face today, equally no one is buying euros or risk assets more generally, with a smile on their face.
They are not doing so because they believe that the world looks a better place this morning, they are doing so because they had short positions which have reached their risk limits and they are being obliged by their risk managers to cut those short positions.
So, against that background it could say it could extend a little bit further, but I don’t think we could begin to think in terms of a durable rally unless we saw some positive outcomes from the G20 meeting in Mexico. For me, that Mexico meeting is equally as important as the outcome of Sunday’s Greek elections. Q: It was difficult to decipher what Mario Draghi was saying. It’s tough to really understand the fine print within the comments, but he did say that the ECB has tools to act in case the risk to price-stability emerges. What kind of action are you expecting from the ECB and do you expect to see the euro stabilise at these levels because we have seen a bit of a recovery there to that 1.26 zone?
A: A more general point about central bankers. I am reminded about something that Alan Greenspan said when he was chairman of the Fed. He once said, in response to a question, that if you believed you understood him then you weren’t listening properly.
Central bankers often talk in opaque and vague language, but what Draghi is saying is that the ECB has got the flexibility, if required, to aid significantly in terms of markets. It has done two-long term repurchase operations, there is nothing in its constitution or its mandate that would prevent it doing a third or fourth or a fifth.
It has already activated its securities market purchase program. There is nothing to stop it reactivating that. For all those people who say that the ECB is not allowed to buy debt in the primary market, would pose the question, ‘What happens if they do?’ Because Draghi is not going to be sent to prison, the ECB is not going to be fined, its not going to be disbanded, so there is really no sanction that can be put on the ECB if it were to exceed its mandate.
So, I think he is right to let us know and to remind us that there is plenty he could still do. I think they stand ready to do it. In terms of the euro, we are of the view that the euro is not going to break up. We are of the view that 12 months down the track it will be stronger than it is today.
But there is that very real threat of a deep V-shape in the interim and if Syriza, were to become victorious in Sundays election then even though we see a Greek euro exit as being ultimately a positive because it would lead to a policy response, we would certainly have to look at the possibility of going below 120.