US turmoil hits NZ market - again

Reuters

HERE IT COMES: The malaise in US financial markets will strike in New Zealand too, BNZ economists said.

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The New Zealand sharemarket fell 3.5 per cent today as global markets tumbled with concern mounting about banking and financial firms in the United States.

The benchmark NZX 50 index tumbled 111.9 points, or 3.5 per cent, to 3,158.0. Across the Tasman the Australian benchmark ASX 200 index was last down 163.3 points, or 3.46 per cent, at 4,558.9.

Here the big three listed companies were all down significantly. Telecom shed 8 cents to $2.73, Fletcher Building fell 32 cents to $6.95, and Contact Energy dropped 15 cents to $8.61.

Discount retailer The Warehouse slipped 13 cents to $3.07.

Westpac senior economist Doug Steel said of most immediate concern was the fact that central banks around the world were having to "pump money in to keep grease in the financial engine so it can keep turning over."

The New Zealand financial system borrows about a third of its funds overseas. Steel said the cost of that international credit had increased putting upward pressure on domestic interest rates.

In response to this Steel expects the Reserve Bank to cut the official cash rate by half a per cent at its next rate setting meeting on October 23 followed by a further quarter per cent at both its next two meetings on December 4 and January 29. That would drop the OCR to 6.5 per cent, in the wake of last week's half a per cent cut to 7.5 per cent.

However, Steel said there was even the prospect of the Reserve Bank cutting the OCR between meetings. It last did this - twice - after September 11, 2001.

"The risk that the Reserve Bank has to cut intra-meeting is rising," Steel said.

"That's not to say that we expect that to happen but certainly if the turmoil continues and intensifies it's certainly a possibility."

US stocks tumbled overnight as concern mounted that further financial companies would fail following the Government's US$85 billion bail out of insurer American International Group.

The three key US indexes all posted big falls. The Dow Jones industrial average fell 449.36 points, or 4.06 per cent, to 10,609.66, the S&P 500 fell 57.20 points, or 4.71 per cent, to 1,156.39 and the Nasdaq shed 109.05 points, or 4.94 per cent, to 2,098.85.

Rickey Ward, joint domestic equities manager at Tyndall Investment Management, said sharemarkets were being driven by fear and New Zealand was no exception.

"The old saying in the markets is that they're driven by greed and fear," Ward said. "We've seen the greed three years ago when the market just kept rallying, now you're seeing fear."

"Fear of the financial sector, fear of what banks are going to go, what insurance companies are going to go. Just fear in general about recession."

Ward said the sharemarket was in classic bear mode when trading was done on sentiment rather than valuations. This was likely to continue until some confidence returned to global economies.

The old saying that when Wall Street, the hub of the world's biggest economy, sneezed the rest of the world caught a cold, was in play.

"If we [New Zealand] don't catch a cold we'll certainly get the elements of a flu because our vital ingredient is global growth," Ward said.

"So if the US goes into a deep recession, or slows down to any great magnitude, then surely that has got to impact everywhere else around the world who are heavily dependent on the US to help support growth."

Nonetheless he felt there were some solid New Zealand listed companies being sold off to levels inappropriate for patient, long-term investors.

These included "solid cashflow businesses" such as SkyCity Entertainment Group, Contact Energy, Auckland International Airport and Guinness Peat Group.

Steel, meanwhile, said the turnaround would come when enough investors felt assets were once again cheap enough to buy.

"At what point that is it's extremely difficult to say," Steel said.

"Fear is front of mind for many investors right now."