KEY POINTS:
The US Congress' rejection of Wall St's crucial trillion dollar rescue package saw the New Zealand share market dragged steeply lower this morning with retail investors running for the exits.
The US Treasury's US$700 billion plan to buy bad US home loans from struggling banks was narrowly rejected by Congress early this morning New Zealand time sending Wall St's key Dow Jones Industrial Average 770.59 points or 6.92 per cent lower to 10,372.54 in its worst decline since it reopened after the September 11, 2001 attacks.
The NZX-50 plummeted more than 4 per cent within minutes of opening and was down 4.3 per cent shortly before midday.
Amongst the market's top stocks Telecom fell 14c to 42.64, Contact Energy fell 32c to $7.97 and Fletcher Building was down 35 cents to $6.56.
Market commentator Arthur Lim said while the losses were fairly steep, turnover was not huge.
"I would say at this stage there's a fair bit of retail selling plus some marginal institutional selling. Institutions know that in this kind of market if you try to sell in volume, the share price will drop 10 per cent on you. It can't realistically be done."
Lim believed retail investors were still haunted by the memory of 1987 bloodbath, from which the New Zealand market, unlike most others never recovered.
"We are getting some investors simply saying get me out at any cost."
"The mindset is a high level of nervousness, when something like this happens you are liable to get this panic reaction."
ASB chief economist Nick Tuffley says further falls in the New Zealand sharemarket will depend on how other Asian markets open today.
All eyes will be on Australia's sharemarket which opens at 1pm New Zealand time.
Australian financials like Westpac and ANZ which are listed in New Zealand and Australia have already been hit hard in New Zealand and are expected to fare worse in Australia.
"As we go through each time zone the markets will digest the news and we are likely to see equities take a big hammering today," he says.
Beyond today Tuffley said it would depends on how the markets settle and whether the US authorities came up with another proposal.
One thing is certain is that the high level of volatility New Zealand has seen this year is set to continue.
Tuffley said the pressure on equities and the US dollar meant investors were fleeing into US Treasury bonds - seen as a safe haven. While big saver nations like Japan pulled their money back resulting in a stronger Yen versus the greenback.
Longer term Tuffley said the failure of the plan could result in a longer period of slow growth in the US which would impact on global growth.
While only 10 per cent of New Zealand's exports go to the US this country also exports to Asia and Europe where the effects of the US down-turn are likely to be felt later.
"Yes we are in a mild recession at the moment. Some of the adjustments that are going to have to be made by other countries have already been put in place here. Interest rates are coming down and tax cuts will help put a floor under our economy.
"Next year we will recover but it will be a weak recovery dragged down by our very weak property market.
"The US economy had been holding up well. At best it will be flat. But it could be heading for recession which it has managed to stem off to date."
Arthur Lim said the companies on the NZX these days were generally 'very solid stable businesses' with strong balance sheets unlike the highly leveraged spectacular casualties of `87 such as Chase Corporation and Equitycorp.
Moreover, New Zealand should be somewhat immune to really sharp falls because investors here had not borrowed to invest in stocks as much as there offshore counterparts.
In what are known as margin calls, leveraged investors are often forced by lenders to sell their holdings once their paper losses reach a certain point. That selling will in turn force stock prices lower.
"That's where a lot of the hurt is happening out there."
However Lim said things could have been much worse on Wall St overnight if not for the current ban on short selling, where investors sell stock they have borrowed in the belief they will be able to buy it back and return it to the lender later on, thereby booking a profit.
"By virtue of them selling even more aggressively they hope to precipitate what can be described as panic. It just feeds on itself."
Lim said the present turmoil would likely continue for the next few days until US Congress reconsiders the bail out plan.
