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Sharemarkets around the world, including New Zealand's, dropped again yesterday on poor showings by key Wall St stocks and a report from a leading investment bank arguing the world's largest economy is already in recession.
The NZX-50 dropped more than 1 per cent in early trade to a 13 month low of 3883.76 - below the 3894 point plumbed last year when the sub-prime crisis first hit markets.
However, the local market recovered over the session to close 16 points, or 0.41 per cent, lower at 3912.17.
Yesterday's fall was the fifth down day in a row. The New Zealand market has now lost $2 billion in value since opening for business on January 3.
US stocks closed sharply lower on Tuesday after phone giant AT&T warned of soft consumer spending and the United States' largest mortgage lender Countrywide's shares went into freefall on rumours it was on the brink of receivership.
Analysts said the news from AT&T was a further indication that US consumers were struggling.
The Dow Jones industrial average closed 1.86 per cent lower, the S&P 500 Index was down 1.84 per cent and the the Nasdaq Composite Index was down 2.36 per cent.
"It's been a very poor start to the year," First NZ Capital head of research Barry Lindsay said.
"It is a bit deflating, one feels a bit beaten up and a bit disappointed that US gloom has cast a shadow over all markets around the world. Of course we're all waiting to see when it ends."
Lindsay, however, was optimistic that intervention by central banks would eventually restore battered investor confidence via interest rate cuts and increased liquidity.
"Later in the year we should get some improved performance - but that might be a recovery from a lower base than exists today."
That said, he believed the local market had to some extent been oversold in recent sessions.
"Some New Zealand stocks have been pretty harshly treated. Vector, for example, sank to near all-time lows yesterday.
"It's a utility and has a secure stream of income but the market's really dealt to it. It's a similar situation for Telecom."
Vector sank as low as $2.13 before inching back up to close just 3c lower for the day at $2.18. Telecom eased 4c to $4.18 before bouncing to close 3c higher on the day at $4.27.
"I just think that investors, rather than panicking and throwing stocks out when they feel uncomfortable about the sell-off in the US, should actually look for bargains and buy on dips good quality companies that don't deserve to be trashed in selling as a consequence of what's happening offshore."
The negative sentiment that has kneecapped the local sharemarket is one of a number of effects now being felt here from the US sub-prime financial crisis, and a consequent wider economic slowdown that is threatening to pitch the US into recession.
Leading US investment bank Merrill Lynch argued this week that the US is already there, citing employment data released on Friday showing the US jobless rate hit 5 per cent in December.
"According to our analysis, this isn't even a forecast any more but is a present day reality," the report said.
However, others disagree, including the US National Bureau of Economic Research, which has the official say.
"I think we're not in a recession now," NBER president Martin Feldstein said yesterday.
"But I think there is a serious risk that it could get worse and we could see an actual downturn," he added.
Merrill said the current consensus view on Wall St that there is a good chance of avoiding a recession is "in denial".
A number of commentators believe the impact of a US recession on the rest of the world would be less destructive than seen previously because Asian economies such as India and China are now more important to global growth.
But ASB chief economist Nick Tuffley pointed out that the US is still the world's largest economy and US consumers account for about 20 per cent of global demand.
"That risk of the US dragging the rest of us down is still there."
The US-based credit crisis is already having some impact on New Zealand's financial sector, with ANZ National Bank this week raising fixed mortgage interest rates.
ANZ moved its two-year fixed rate up 20 basis points to 9.6 per cent and the one-year fixed rate had risen by the same margin to 9.9 per cent.
