Across the Tasman the Australian sharemarket staged a remarkable turnaround to post its strongest gains since October 2011.
At the close yesterday, the benchmark S&P/ASX200 index was up 136 points, or 2.7 per cent, at 5137.3, while the broader All Ordinaries index was up 129.6 points, or 2.6 per cent, at 5143.8.
The kiwi also reclaimed ground after a China-inspired selldown, trading at US64.99c after briefly slumping as low as US62.44c, but US1c down from Monday's close.
Concerns about China - New Zealand's biggest customer for dairy exports - showed through in the NZX wholemilk powder futures market where there was selling across the curve after a substantial rally over the past fortnight.
JB Were investment strategist Bernard Doyle said there was relief that equity markets here and in other parts of the region had reclaimed ground after posting big losses on Monday.
"It's been a 90 per cent sentiment, 10 per cent reality type of sell-off, so any evidence of stabilisation is a good sign," he said. "From our perspective, I think you need a little more than that to take away the underlying fragility of the market."
Doyle said JB Were remained "constructive" about equities generally, particularly when most central banks around the world were keen on stimulating growth, but he said more information was needed on China's economic growth prospects before markets could settle.
Nigel Brunel, director of financial markets at OM Financial, said the markets had entered a phase of considerable volatility with China at its centre. "This may have an impact and knock-on effect on commodity markets, including milk."
Fund managers said the local market could expect to see more turbulence arising from volatility in offshore markets, but that the New Zealand economy was in better shape than many of its peers.
Furthermore, the Reserve Bank had more leeway to cut official interest rates if there was a marked turn for the worse.
The official cash rate stands at 3 per cent, and economists expect to see two rate cuts of 25 basis points apiece before the year is out.
Analysts and fund managers said the decline could present a long overdue correction after a very strong period for equities both domestically and overseas.
"We have had a very strong run in the capital markets in the last three years and it's not a surprise to to see it falling back," said Mark Lister at Craigs Investment Partners.
In the United States, the market has gone up 100 per cent in the past five years. "It's been four years since we've had a correction of any magnitude and have had six or seven great years," Lister said.
