Friday 9th February 2018
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New Zealand shares dropped this morning as US markets enter correction territory, where stocks fall more than 10 percent from a peak, as the prospect of higher interest rates prompts investors to rethink their strategies.
The S&P/NZX50 fell 121.9 points, or 1.5 percent, to 8,055.24 as at 10.30am, on turnover of $39 million.
New Zealand's market is the first to open in the world, and follows a lower close on Wall Street, with the Dow Jones Industrial Average down 4.2 percent and the Nasdaq 100 dropping 4.2 percent. The Standard & Poor's 500 fell 3.8 percent taking it to more than 10 percent below its January high, the threshold analysts see as a technical correction.
Volatility returned to skittish financial markets as investors reassess valuations as they adjust their expectations for the pace of inflation and interest rate increases by the Federal Reserve, with the Volatility Index, known as Wall Street's 'fear gauge' at 33.46. US markets plunged on Friday but recovered some of those losses earlier in the week. The local bourse dropped 2.1 percent on Monday but seemed to have calmed by Wednesday as global markets rallied.
Peter McIntyre, investment adviser at Craigs Investment Partners, said the gains earlier this week looked like "a bit of a dead cat bounce" and the volatility in global markets was likely to stay for a while.
"It's not a credit crisis, it's part of the process towards normalisation of more neutral interest rates when we've had a prolonged period of low interest rates which had to inevitably change at some stage," McIntyre said. "You're seeing a lot of investors look to profit-take while there is still significant profits there, and you've got to remember we're only really going back to December 2017 with regards to where the market is. While it seems significant it's really just taking the top off January and most of those December gains.
"You had a lot of complacency, the volatility index was very low, good news coming out of the US and tax reforms being passed with emphasis on companies that are US based being able to boost profits, we haven't seen any reform there for 30-odd years and it all looked very positive," McIntyre said. "A lot of investors were buying the momentum, and fund managers need to be there, and we're seeing that momentum buying on the downside as well - those that don't want to be left sitting there if the market was to pull back further."
McIntyre said it would be interesting to see where US futures are this afternoon, and where the US market opens up, but the local benchmark index has been broadly hit by this morning's selling.
"We'll get more flavour when the Aussie market opens up, but we are a low-beta market, with more defensive stocks not necessarily high growth stocks. We won't see the swings and falls that we're seeing overseas, but it's going to be a difficult trading day and depending on the futures next week could be very volatile as well."
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