Volatility is expected to continue

On Friday markets were pricing in an 18 per cent chance of the Fed hiking rates this week, down from 34 per cent earlier this month, according to Bloomberg. Photo / AP

Markets are expected to remain choppy in the lead-up to this week's much awaited meeting of the US Federal Reserve.

A more than two-month stretch of calm came crashing to an end this month as fears emerged that America's central bank may announce a rate hike on Thursday (NZ time).

Craigs Investment Partners head of private wealth research Mark Lister said equity markets were likely to remain volatile this week ahead of the Federal Reserve announcement.

"Markets are quite confused about what the Fed is doing," Lister said.

"You've had some varying tones from some of the different Fed members so the message has been somewhat unclear, which has been a factor in the volatility along with a whole range of other issues."

Wall St rallied sharply overnight on Thursday after weaker-than-expected US retail sales and manufacturing output reduced bets the central bank will increase rates on Thursday.

On Friday markets were pricing in an 18 per cent chance of the Fed hiking rates this week, down from 34 per cent earlier this month, according to Bloomberg.

New Zealand shares, particularly large-cap stocks, have been a major beneficiary of a low interest rate and bond yield environment that has prompted international investors to pile into Kiwi equities for the lucrative income they often provide through dividend payments.

That dynamic - which has helped to push the S&P/NZX 50 up by about 14 per cent in the year to date - goes some way towards explaining why the local index was hit harder than many of its global counterparts during last week's volatility.

The New Zealand sharemarket would lose some of its allure if interest rates and bond yields were to rise.

The NZX 50 index fell 5 per cent in the six trading days to Thursday, before recovering on Friday to close up 0.8 per cent for the day at 7250.51.

But Wall St's Thursday rally proved short-lived, with US stocks falling again overnight on Friday (NZ time). The S&P 500 closed 0.4 per cent lower.

That sentiment may weigh on the local market when it opens today.

JBWere investment strategist Bernard Doyle said New Zealand shares had been about twice as weak as global markets during last week's sell-off.

"Just as our equity market has thrived in an environment of falling yields, it will struggle if the tide ever turns and bond yields move materially higher," Doyle said in a note.

The Reserve Bank is expected to hold the official cash rate steady at a record low of 2 per cent when it reviews it on Thursday.