The New Zealand sharemarket opens today facing a fresh round of jitters after Wall St slumped 5.1 per cent in the three days to end the week - the biggest decline for the S&P 500 since it sank to a 12-year low in March.
The S&P 500 erased its 2010 gain, retreating 3.9 per cent for the full week as banks plunged on a White House proposal to limit financial risk and China moved to cool economic growth.
"It's a one-two punch," said Ralph Fogel, head of investment strategy at Fogel Neale Partners in New York, of the curbs on Chinese growth and Wall St firms.
"In the end it's going to have the same impact - less flow of money into the marketplace."
The VIX, an index of volatility known as Wall St's "fear gauge", jumped 55 per cent to 27.31 over the period, its largest gain since 2007.
Uncertainty over whether Federal Reserve chairman Ben Bernanke will win Senate confirmation for a second term beginning on February 1, even with Obama's backing, also undermined investor confidence, traders said.
The concern rippled into other markets, pushing the benchmark MSCI Asia Pacific Index, which includes the New Zealand stock exchange, into its biggest weekly drop since March.
"It does look like we're going through some sort of a correction," said Shane Oliver, head of investment strategy in Sydney at AMP Capital Investors, which oversees about US$90 billion ($126 billion) globally.
"There are some worries about the extent of tightening in China. I don't think they're seeking to crunch their economy, but obviously the market worries that that will be the case."
The People's Bank of China unexpectedly raised lenders' reserve requirements to curb liquidity.
It will raise interest rates by the end of June, as well as increasing banks' reserve requirements.
"China has done the heavy lifting in the recovery process, and now needs to cool its economy down a little bit," said Prasad Patkar, at Platypus Asset Management in Sydney.
"Policy tightening measures will be forthcoming, but they need to be viewed in the context of how strong the economy has been."
Metal prices fell amid speculation China will restrict lending and raise borrowing costs to prevent the economy overheating.
The concern sent Australian mining stocks down and came on top of news reports that a review of Australia's tax system may recommend taxing mining projects in the same way as energy projects, a change that would have raised an extra A$14 billion ($12.7 billion) over the past three years.
Signs of a pick-up in economies around the region have driven the MSCI Asia Pacific up by almost 50 per cent in the past year.
Companies on the index are priced at an average 1.6 times book value, near the highest level since September 2008.
"The market remains overheated and there will be some more corrections," said Mitsushige Akino, at Ichiyoshi Investment Management in Tokyo.
But one senior Chinese Government economist said it was too soon for China to raise interest rates because inflation was still containable and a rate hike could spur an unwelcome influx of speculative money.
Xia Bin, head of the financial institute of the Development Research Centre, a Cabinet thinktank, said China's economy could maintain relatively rapid growth of at least 8 per cent this year and keep consumer price inflation down to about 3 per cent, the official China Securities Journal reported.
Xia warned that if China raised interest rates before the United States did, it might attract inflows of "hot money" while the consumer price index was still within a range where it could be kept under control.
Data released late last week showed China's economy grew 10.7 per cent in the fourth quarter from a year earlier while the December CPI jumped 1.9 per cent year-on-year, accelerating from November's 0.6 per cent rise.
- BLOOMBERG
Nervous days ahead for investors
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