LTROs will only provide short-term boost to mkts: Nomura

The outcome of the second round of Long Term Refinancing Operations (LTRO) will be important for equity markets, but issues other than LTROs will drive sentiment in the medium term, feels Ian Scott of Nomura. Under LTRO, the European Central Bank will give three-year loans to European Banks at 1%, to infuse liquidity into the banking system and also help banks repay their maturing debts. In December, the ECB had loaned 489 billion euros to more than 500 banks.

According to a report in the Wall Street Journal, banks are set to borrow anywhere between 300 billion-1 trillion euros in the second round of LTRO. Improved liquidity in the banking system is expected to spill over to risk assets like emerging market equities. The Indian stock market itself has rallied over 15% since the start of this calendar, buoyed by a fresh wave of foreign fund flows. Scott is a bit circumspect on emerging markets in the short term, given the recent run-up and sees a "small dip", even though the broader trend remains upwards, he told CNBC-TV18 in an interview. And while rising crude prices is giving anxious moments to investors in oil importing economies, Scott feels the market is now getting accustomed to higher oil prices. Brent is now trading around USD 124 per barrel, having risen over 15% in 2012 so far, because of the political friction in the Middle East involving Iran and Israel. Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying video. Q: How important would the LTRO announcement be for determining the short-term course of global markets? A: I think the second LTRO allotment is an important development for the short-term direction of the market. However, I am not sure that it will have a major impact over the medium-term. Consensus seems to be for an allotment of similar size to the first round and I think it would again provide a very strong liquidity support for the European banking system. Q: Is there any possibility of a disappointment because of a quantum of the LTRO which is lower than what the street is pricing in? A: In terms of the amount of the LTRO allotment, with a short-term market focus on it, it could mean that we see a positive response to a larger-than-expected allotment or indeed a negative response if the allotment is lower than expected. However, I think that