NZ sharemarket falls after sharp drop in US stocks

Investors prepare for the likely market backlash from Wall Street's share fall.

The New Zealand share market slumped more than 4 per cent in early trading following big falls on Wall Street, which dropped overnight on recovery-related jitters.

The benchmark S&P/NZX50 index was down 4.36 per cent to 10,767 points as of 11am.

The Dow Jones Industrial Average was down 6.9 per cent at 8am in Wellington, the S&P 500 was down 5.9 per cent and the Nasdaq had fallen 5.3 per cent.

After a 44 per cent rally by the S&P 500 from March 23 to June 8, the market was due for a sell-off, said Milford Asset Management portfolio manager William Curtayne.

"News of a possible second wave of infections in the US, and a lack of additional fuel from the US Fed, appears to have been enough to tip the market over," he said.

"In our opinion, the bad news this week differs little from news over the last couple of weeks such as US riots. The difference is that investor positioning has become bullish enough to react to bad news again."

The market rally since March had come against incredibly poor economic data, Curtayne said.

This had meant the market reacted to the positive developments of improving virus cases and reopening economies rather than longer-term risks such as sluggish economic recovery or the possibility of a virus second wave.

"I'm calling it 'announcement anxiety' from the earlier-in-the-week announcements," said Sam Stovall, chief investment strategist at CFRA Research in New York.

Stovall pointed to news the US fell into recession in February, the fact the US Federal Reserve will keep rates at nearly zero until 2022, "implying the recovery will be weaker than anticipated", and the fact the number of Covid-19 cases in the US is picking up.

"In all, I think the market was looking for a reason to digest recent gains, and it found three," he said.

Both President Donald Trump and White House economic adviser Larry Kudlow sought to reassure investors.

Trump tweeted "The Federal Reserve is wrong so often. I see the numbers also, and do MUCH better than they do. We will have a very good Third Quarter, a great Fourth Quarter, and one of our best ever years in 2021."

For his part, Kudlow told CNBC the US economy appears to have reached its lowest point due to the coronavirus.

"We still have a lot of hardship, and we have a lot of heartbreak in many areas. The numbers are still way too high on the unemployment and so forth," Kudlow said on The Exchange. "But it looks like we've hit a turning point."

Every company on the NZX 50 was weaker, although those that had recovered the most from the March trough were the hardest hit today.

Vista Group International, which has been reeling from the international closure of cinemas, fell 13.9 per cent to $1.55. Retailer Kathmandu Holdings sank 11.8 per cent to $1.05, rental campervan operator Tourism Holdings dropped 12 per cent to $2.06, and national carrier Air New Zealand declined 12.4 per cent to $1.455.

Utilities software developer Gentrack Group, which is expected to leave the NZX 50 in today's quarterly rebalancing, fell 10.2 per cent to $1.50.

"The riskier end of the market has been more impacted," said Peter McIntyre, investment adviser at Craigs Investment Partners.

The move by central banks around the world to cut interest rates into negative territory and expand existing money-printing programmes even further has spurred investor appetite for equities, given there is little or no return available from bonds and bank deposits.

McIntyre said a correction of between 10 per cent to 15 per cent was realistic, and even healthy, as investors had got ahead of themselves.

"We've seen the market rise in big jumps and as they say, 'it takes the stairs up and the elevator down'."

CMC's Smith said the recovery trend would remain intact in the medium-term with central bank stimulus and permanently low interest rates providing support to equity markets.

The kiwi dollar also didn't come through unscathed and was trading at 64.27 US cents at 8am in Wellington from 64.92 cents at 5pm yesterday.

Kiwibank currency dealer Mike Shirley said the lift in Covid-19 cases was raising fears of a second wave of infections but the "overarching theme was concerns around the real economies of the world", highlighted by yesterday's forecasts from the Organisation for Economic Cooperation and Development.

ANZ Bank strategist David Croy said it was likely "some hot air is just being released" and the overall tone of Fed chair Jerome Powell's commentary and the Fed's stance should support risk.

"They have reaffirmed that the fed funds rate will stay at zero, committed to maintaining bond purchases at 'at least the current pace' and are open-minded to yield curve control."

- Additional reporting BusinessDesk