KEY POINTS:
The New Zealand sharemarket followed its larger overseas counterparts higher yesterday in a relief rally sparked by the United States Government's massive bailout plan for its financial sector.
A sustained recovery, however, is probably some way off, say market watchers who warn that the real fallout from the 13-month-old credit crisis is yet to arrive.
The NZX-50 gained 68.59 points or 2.15 per cent to close at 3255.72, having risen as much as 3 per cent during the session.
UBS managing director Campbell Stuart said market activity, excluding off-market trades completed before the opening bell, was reasonably modest with little activity evident from large overseas investors who were obviously focusing their attention elsewhere.
"Initially you always concentrate on your biggest issues and so New Zealand will be somewhat secondary."
Nevertheless, yesterday's gains were a relief. "Last week everyone was feeling a tad green so it's pleasing to have got through that period."
While significant, the local gains were dwarfed by Friday's 3.4 per cent jump by the US Dow Jones index and the S&P 500's almost 4 per cent rally as Wall St welcomed the US Treasury's unprecedented US$700 billion plan to buy up toxic debt securities from battered financial institutions.
"It's pretty clear that the message from the US Treasury and Federal Reserve is that confidence in the US financial system must be restored whatever the cost," said First NZ Capital economist Jason Wong.
"[It's] going to be quite useful in terms of increasing confidence in the stability of the system and increasing risk appetite."
Evidence of that increasing risk appetite could be seen not just in equity market gains around the world but also in sharp rises in high-yielding currencies including the New Zealand dollar, which closed last night at US68.69c having hit a three-week high of US69.19c during the day.
"It remains to be seen how long that confidence will be maintained," said Westpac currency strategist Michael Gordon, who added it was too soon to be certain about what the US bailout plan meant for currencies.
First NZ Capital research manager Barry Lindsay believed the strength of the rally on overseas markets including London, where the FTSE bounced by a staggering 8.8 per cent on Friday, and Australia, where the ASX-200 rose 4.5 per cent yesterday, could be because of short sellers closing out their positions.
Short sellers borrow shares and sell them in the hope that they will go down. Then they buy them back at the lower price and pocket the difference.
The practice has sparked controversy in recent months as it has been suspected that short sellers have encouraged rumours of difficulties at their target companies, hastening their demise.
The practice has been temporarily banned in the US, Britain and Australia in hopes of reducing market volatility.
Short-selling targets in Australia bounced yesterday as the country's corporate regulator extended a ban on short selling to covered transactions. Babcock and Brown leaped 54 per cent.
The NZX said last night it would not ban short selling in New Zealand. Chief executive Mark Weldon said short selling was minimal here and not a problem.
Meanwhile, Wong said overseas investors whose dash for the exits this year has been a major factor in the local market's fall were not likely to be back in a hurry.
"You think about where global investors like to park their money in times like this - it's certainly not a country with a high current account deficit, unsustainable growth, a vulnerable currency and an economy that is already in recession."
Even if the US bailout did mark a turning point in the credit crisis, "the economic impact is only just beginning", said Wong.
"It's probably going to be very much a U-shaped recovery rather than a V-shaped one".
