EU nervous on events; No rally sans strong currency: NAB

Nick Parsons, head -research, UK and Europe, National Australia Bank, explains to CNBC-TV18 that the European equity markets are nervous on the simultaneous occurrence of events such as the ECB's announcement that it could not partake in any future debt-restructuring and the Italian Prime Minister's announcement that he would not run for re-election in spring.

Parsons adds that a rally in the equity markets without a rally in currency is akin to building a house on sand.

Below is an edited transcript of the analysis on CNBC-TV18.

Q: The mood at least in the European equity market appears fairly nervous. What’s the mood now amongst the investors and on the way forward?

A: You are right to describe it as nervousness and it is that. It is certainly not fear and a long way from panic. There are several reasons and though each of them individually don’t amount to a great deal. But if you put them together, they kind of make a story, a narrative and a theme. And those piece of news all relate to the politics of monetary policy.  

Firstly, the ECB's announcement that it could not partake in any future debt-restructuring spooked holders of bonds, secondly, the Italian Prime Minister announced that he would not run for re-election in spring, thirdly, the Bundesbank criticised the IMF for poor risk management and lastly, people took to the street to protest in Spain.

So though the market would have been able to cope with each of these events individually, the occurrence of all these events within a few hours led to some nervousness amongst investors.

Q: Will all of these factors together snowball into a big risk-off across global markets or do you think these are just minor jitters?

A: I think that's the key question and we should look at these events in the context of what we have already seen over the quarter. There have been some spectacular equity returns over the quarter-to-date and across the major markets in Europe, the Euro Stoxx is up 11.5 percent and even in Spain, the markets provided a 12.4 percent return on the quarter.

The Sensex is up 6.9 percent since July 1. So yes, there is a little bit of profit-taking, amongst investors who had the rally and it is fair to say that though they are in the minority, there are a lot of investors who have missed out on this rally and are looking to buy into dips, which for the moment, at least, should keep the downside fairly well contained.

Q: What's the call on India now?

A: Our view on the market is that investors should never trust a rally in the stock market unless it is accompanied by a rally in currency. I am very encouraged by what I have seen recently in the rupee which has gone all the way upto 57.30 in June and has managed to stabilise at 55-56 throughout July and August.

Over the last three weeks, the currency has returned to strength which is vital if India seeks overseas participation in the stock market. We think that a market rally that without overseas participation is a rally built on sand. A stronger currency supporting a stronger equity market is a very positive sign.