KEY POINTS:
The second equity slump in two weeks, this time sparked by a US mortgage meltdown, spread to Europe last night after hitting the New Zealand market.
The NZX-50 dropped more than 1.3 per cent yesterday after Wall Street fell on news that subprime mortgage lenders - those operating
at the riskier end of the home loan market - were facing record levels of default.
European stock markets tumbled in early trade. The pan-European FTSEurofirst 300 index was down 2.2 per cent and London's FTSE 100 index lost 1.8 per cent.
"This seems to be the second leg of the global fall in equities and there is very little impetus to jump in and buy," said a trader.
"It's time to fasten seat belts."
Two weeks ago the New Zealand market dropped 1.5 per cent after a sharp fall on the Shanghai market sent shockwaves around the world.
However, local trading volumes were light yesterday and brokers remained confident this was not the beginning of a bear market for New Zealand investors.
Stephen Wright, of ASB Securities, said: "Some people are going to say this is the second one and this could be the start of a real downturn, but there is really no evidence of that."
Between the volatility two weeks ago and yesterday's fall, the NZX had seen some strong buying from global institutions, Wright said.
"I think New Zealand still has plenty of support, its just that those sorts of buyers tend to do nothing on days like this."
As with the Shanghai slump, the NZX generally held up better than other markets.
The initial US drop saw the Nasdaq and Dow Jones shed about 2 per cent. That prompted a falls of almost 3 per cent in Japan and Hong Kong. In Australia the ASX dropped 2 per cent.
Yesterday's fall was proof there were still some jitters in the local market, said Grant Williamson, of brokers Hamilton Hindin Greene.
"Investors are still nervous, particularly the highly leveraged investors," he said.
"When you get falls like this it shakes out a lot of those investors that don't have the staying power."
That sort of correction was quite healthy for the market and buying could pick up again quite quickly.
But there was still a chance of more volatility over the next few days as things settled down, he said.
Overall, yesterday was quiet with very little retail selling.
"We certainly haven't seen investors panic in quite the same way as the Chinese fallout," he said.
Lending risks come home to roost
The subprime mortgage market - which dragged Wall St down this week - is the riskiest segment of the US mortgage market, which serves borrowers with poor credit histories at high interest rates.
The sector has seen rising default rates in recent months amid falling prices and slower sales in the housing market. At least 20 lenders in the sector have gone out of business as a result.
Yesterday the Mortgage Bankers Association said lenders began foreclosure against more than one in every 200 US mortgage borrowers in the fourth quarter, a record. There is concern the crisis could spread to more mainstream lenders.
- REUTERS