KEY POINTS:
The New Zealand sharemarket recovered slightly from Monday's 1.5 per cent drop but other markets in the region took a hammering as they returned from holiday.
The NZX-50 closed up 9.4 points, or 0.3 per cent, at 3505.9 in light turnover of just under $90 million. The rise is the latest bounceback in 10 months which have seen the greatest market volatility for some years.
Asian stock markets sank yesterday, with China's Shanghai Composite Index falling 7.7 per cent as investors reacted to Government moves to tighten credit and restrain inflation by ordering banks to keep more deposits on hand. Hong Kong's Hang Seng index was down 4 per cent, and Australia's ASX-200 fell 2.8 per cent.
Chinese, Hong Kong and Australian markets were closed on Monday for national holidays, so yesterday was the earliest chance for investors to react to Wall St's steep Friday sell-off.
Hamilton Hindin Greene broker James Smalley said the New Zealand volatility was driven by the amount of uncertainty in the market.
"Situations like this accentuate the difference between those who believe things are going okay and those who think it's all going down. When you have huge differences of opinion - that's what creates these swings."
New Zealand's lack of liquidity was also a contributor to the swings as just a few investors could make the price of a company rise or fall significantly.
"Because of the light volumes being traded, share prices are drifting down - investors are seeing that and don't want to put more money into the market.
"Once it drifts down to a point where it is seen as cheap enough, then investors all start to jump back in, pushing the share price up again. But if there is nothing to sustain the price, it starts to sink again."
Smalley said a lot of investors were sitting on their hands and waiting for things to settle down. He said the main problem was the oil price and if that settled it would also help the markets to become less volatile. But, investors had to face the fact that volatility was likely to be with the market for some time yet.
ASB Securities investment adviser Stephen Wright was another who could not see volatility dropping off in the short term.
However, he said the prospect of interest rate cuts could mean more positive news for companies involved in exporting later in the year.
