NZ market ends down amid global turmoil

Last updated 06:40 30/09/2008
Reuters
JUST SAY NO: A demonstrator stands outside the New York Stock Exchange during a protest, while US lawmakers met to vote on a $700 billion bailout of the financial industry.
JOHN SELKIRK/Dominion Post
GOING DOWN: A bicycle courier watches the share board at the AMP building foyer in Auckland today as the market reacts to the failure of the Wall St bailout plan.
Reuters
FRONTING UP: US Speaker of the House Nancy Pelosi addresses a news conference after the US House of Representatives rejected a Wall Street bailout bill.
Reuters
TENSE TIMES: Traders watch screens at the New York Stock Exchange after the House of Representatives rejected a compromise plan that would have allowed the Treasury Department to buy up toxic debt from struggling banks.
PLUNGE: A graph shows the Dow Jones reaction to the rejection of the bailout plan.

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World bourses plunged during the day but the New Zealand share market ended the day with a more moderate slide of 3.18 percent, an improvement of its heavy opening fall of 4.31 percent.

New Zealand was the first market in the world to open following the US lawmakers' shock rejection of a US$700 billion Wall St bail out plan and a enormous seven percent drop in the Dow Jones on the New York Stock Exchange.

Significantly New Zealand's market volumes have been very light at $121 million.

Among the leaders Air New Zealand closed down three cents to 97 cents, ANZ down 63 cents to $22.06, Contact Energy down 47 cents to $7.82, Fletcher Building down 26 cents to $6.65, Mainfreight was down 28 cents to $6.47, Telecom lost a cent to $2.68 and Vector down 11 cents to $2.11.

With a big crowd watching in Melbourne, the Australian Stock Exchange opened five percent down, like the Japanese Nikkei. In later trading both markets halved their losses.

Similar numbers were showing up on Hong Kong, Shanghai and Singapore while world attention will overnight focus on the European markets, particularly London.

The ASX tried to blunt the damage, staggering its opening by releasing stocks alphabetically but still the 5 percent drop happened within minutes.

The Australian stock market closed down 4.3 percent, losing about $55 billion in value, as investors fled most sectors after the US Congress voted down a $US700 billion ($A879.78 billion) bailout package for US financial firms.

But the decline was not as bad as expected, with the major indices recovering some early losses after the Federal Government reassured Australians the nation could weather the financial storm in the US.

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Heightened expectations that the Australian central bank could to cut official interest rates by half a percentage point next week to support the economy also prevented the market from mirroring a near seven percent decline in the US market overnight.

The benchmark S&P/ASX200 closed 206.9 points, or 4.3 percent lower at 4,600.5, while the broader All Ordinaries fell 207.9 points, or 4.3 percent, to 4,631.3.

It is the biggest one-day fall since January 22 this year, when the S&P/ASX200 index lost 7.05 percent and the All Ordinaries fell 7.26 percent.

Australian market had fallen about 5.5 percent in morning trade, carving roughly $65 billion off its value.

CommSec chief equities economist Craig James said the Australian market, as with others in Asia, had held up pretty well.

"We're seeing some big declines in our banks but nowhere near that seen for financial stocks around the world," Mr James said.

"Our banks are much more solid."

ASB Securities managing director John McMahon said the overriding feature of the New Zealand sharemarket reaction was the very light volumes - and this was critical in assessing how NZ traders were reacting.

He told Fairfax Media this reflected "extreme caution" on the market here.

"There is an old brokers' wise crack about more sellers than buyers. In this case there are few sellers around and almost no buyers," McMahon said.

In about the only counter-reaction to the US inspired gloom the South Pacific Stock Exchange in military ruled Fiji saw its KSPX index up 0.45 percent.

Market observers don't see a quick end to the volatility here.

Tyndall Investment Management joint equities manager Rickey Ward said: "You are just going to see a continuation of the volatility in markets as people try to grapple with these issues."

He believed that "some form of commonsense" would eventually come into play in the US and a compromise solution would be found to the financial market's problems.

"The stability of the markets has gone and you need to create some stability to get credit markets to grow and operate again."

Bank economists were urging against overreacting to the developments overnight on Wall Street. ANZ chief economist Cameron Bagrie said: "We need to step back to see what unfolds over the course of the week."

BNZ chief economist Tony Alexander said: "This is just a one-night development. Things could completely change overnight."

Bagrie said what happened now came down to what eventually emerged with the bailout bill. "If it doesn't go through, we can expected further sharemarket weakness and greater downwards pressure on the RBNZ official cash rate."

While a lot of talk has centred on New Zealand being relatively insulated from the turmoil, Tyndall's Ward doesn't really see that - pointing to the need of our banks to raise money offshore. The volatility is meaning banks are having to borrow money at high rates and then on-lend it to New Zealand businesses at high rates.

"I don't think we are insulated at all. I spoke to a number of corporates at the weekend who said that their biggest issue was the terms of borrowing that they now have with the banks.

"Because remember, our banks obtain a lot of their funding from overseas - and a lot of that's from the US.

"So just because we get a reduction here [through the Reserve Bank lowering our rates] that doesn't mean it is being passed on to the corporates - or to you and I as consumers because the banks have got other funding issues themselves.

"So we are not immune from it. People might like to think we are but we are not because of our funding requirements from these banks."

Global market observers are now likening the current crisis to the events of 1929 that led to the Great Depression. Ward said he couldn't recall another time of such turbulence and uncertainty.

"For me, I've seen short sharp shocks, but not this prolonged period of unease and uncertainty. Even 9/11 and those sorts of issues got resolved reasonably fast. This thing's been going on for well over a year now and we are still no closer to the conclusion than we were from when we first heard about it in August last year.

"And there doesn't seem to be any end in sight..."

SHOCK VOTE

US lawmakers rejected a US$700 billion bailout plan for the financial industry in a shock vote that sent global markets sliding as European authorities scrambled to prop up a slew of banks.

The Dow Jones industrial average posted its largest point decline ever while the benchmark S&P 500 had its worst day since the 1987 crisis with an 8.8 percent drop. Latin American stocks tumbled 13 percent, their biggest decline in more than a decade.

Even before the vote, Asian and European markets had plummeted on fears the crisis was spreading, while US regional lender Wachovia became the latest big bank to succumb to the crisis.

And global money markets were frozen even as central banks poured hundreds of billions of dollars into the financial system to persuade financial firms to stop hoarding cash.

"There's a monster amount of fear out there. This is global contagion. It's no longer just the United States," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

The House of Representatives voted 228-to-205 against a compromise bailout plan that would have allowed the Treasury Department to buy up toxic assets from struggling banks. House Republicans, in particular, balked at spending so much taxpayer money just before the November 4 US elections.

"I can't believe they weren't able to come together and come up with a solution. Complete disaster was predicted if it didn't pass," said Stephen Berte, senior equity trader at Standard Life in Boston. "I can't see what the upside is right now."

US President George W Bush huddled with economic advisers, including Federal Reserve Chairman Ben Bernanke, to consider the administration's next move.

"We need a plan that works," said US Treasury Secretary Henry Paulson, the Bush administration's point man on the bailout since the first plan was announced over a week ago. "We need it as soon as possible, and we're just committed to working with congressional leaders to get it done."

Investors rushed to assets considered a safe haven. Government bond prices and gold jumped, and oil fell below US$99 per barrel on the view that world demand will contract as the financial crisis puts the brakes on economic activity.

"What should have been a day of hope turned into a day of desperation," said Marco Annunziato, chief economist for UniCredit in London. "We are facing a systemic crisis of confidence in the global financial system that is pushing us increasingly close to a complete meltdown."

World stocks, as measured by the MSCI's world index, lost about US$1.7 trillion for the day.

BAILOUT PROSPECTS UNCERTAIN

In Washington, the failure of the bailout bill - after more than a week of intensive closed-door negotiation intended to hammer out a compromise plan - brought new uncertainty about the response of the US government to the worst financial crisis since the Great Depression.

Republican House members voted against the rescue package by a more than 2-to-1 margin. A majority of Democrats voted in favour.

Both parties blamed each other for the failure of the closely watched bill after hours of closed-door negotiations intended to add provisions to protect taxpayers and head off criticism that Washington was riding to the rescue of bankers many Americans blame for triggering the housing crisis.

"What happened today cannot stand. We must move forward," House Speaker Nancy Pelosi told reporters. "We are here to protect the taxpayer as we work to stabilize the markets."

US presidential candidates Barack Obama and John McCain had both offered qualified support for the bailout proposal, which now dominates the election with just over a month before the vote.

Obama, a Democrat, said he believed lawmakers would regroup to pass a financial rescue plan. "I'm confident we're going to get there," Obama said as he campaigned in Colorado. "It's going to be a little rocky.

McCain, a Republican who suspended his campaign last week in a failed attempt to broker a bailout deal, called on lawmakers to go back to work. "Now is the time for all members of Congress to go back to the drawing board," he said.

The Senate returns on Wednesday and the House on Thursday after a break for the Jewish New Year holiday of Rosh Hashanah. No laws can be passed in their absence but their staffs could work on a revised plan.

The high-stakes political showdown on the bailout proposal came after Wachovia Corp agreed to sell most of its assets to Citigroup Inc in a deal brokered by regulators. It was one of three US financial deals struck as the crisis deepened.

GLOBAL CONTAGION

Investors said there were ample signs that a financial crisis that started with risky lending to the overheated US property market had gone rapidly global.

"The crisis is going to affect everybody. It's a very difficult situation and it's going to affect economies everywhere," Mexican billionaire Carlos Slim said.

Earlier, the governments of Belgium, the Netherlands and Luxembourg moved to partly nationalize Belgian-Dutch group Fortis NV, and German lender Hypo Real Estate Holding AG secured a credit line from the German government.

Earlier, European shares had dropped to a 3&½-year closing low, with bank shares weighing heavily.

The world's central banks, led by the US Federal Reserve, announced a US$330 billion expansion of currency swap arrangements, which allows them to increase the amount of money they can provide in their home markets, effectively throwing more money at the crisis.

The Wachovia deal was the latest in a series of events that has transformed the American financial landscape and wiped out hundreds of billions of dollars of shareholder wealth.

The changes include the government takeover of mortgage finance companies Fannie Mae and Freddie Mac, the bankruptcy of Lehman Brothers Holdings Inc, the failure of giant savings and loan Washington Mutual, and Bank of America Corp's purchase of Merrill Lynch & Co Inc.

 

- Fairfax Media with Reuters and NZPA

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