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The New Zealand sharemarket was hit hard yesterday by a fresh round of credit market jitters which served to remind markets that the financial world has yet to put sub-prime-related woes behind it.
And today Wall Street has continued to hit the skids - the Dow Jones index dropped more than a 100 points for the second day running.
The NZX-50's 84 point - or 2.38 per cent - fall yesterday was the biggest single day drop the local market has seen this year. The previous worst was a 2.08 per cent fall on March 17 after the collapse of US investment bank Bear Stearns.
US stocks slid on Monday after Standard Poor's downgraded the debt ratings of Lehman Brothers, Morgan Stanley, and Merrill Lynch.
S&P's move signalled that financial institutions, which have written down more than US$350 billion ($446 billion) in losses related to sub-prime mortgages globally, are still vulnerable.
Adding to financial sector misery, Wachovia, the fourth-largest US bank, ousted its chief executive fuelling speculation the bank has yet more bad news to reveal.
The pressure was on even before Wall St opened, particularly for financial stocks, as European markets fell after British mortgage lender Bradford & Bingley said the UK mortgage market was deteriorating sharply.
The Dow Jones industrial average fell just over 1 per cent as did the S&P 500.
However, in New Zealand the benchmark index's 84 point fall to 3540 was twice as deep in percentage terms.
Among top stocks hit hardest were Contact Energy which lost 33c, or 3.48 per cent, to close at $9.15, Fletcher Building down 3.75 per cent, or 30c, to $7.70, and Fisher & Paykel Healthcare down 3.75 per cent, or 9c, to $2.31.
Local dealers said much of yesterday's losses were the unwinding of unjustifiable gains late last week. An institutional dealer said the local market had made ground last week as large index funds matched the reweighting of local stocks on the global MSCI index.
Another broker pointed out some of the gains may have been related to month end "window dressing" - the practice by which fund managers buy small parcels of stock at relatively high prices in order to increase the market value of their portfolios at the time when their performance is being measured.
Those artificial price drivers had now ended and to some extent reversed, which in combination with the negative tone from overseas was driving the NZX-50 sharply lower yesterday, the brokers said.
Last Thursday and Friday, the NZX-50 gained 77 points, or just over 2 per cent.
But yesterday's losses more than wiped that out.
While total turnover worth about $233 million was relatively large, much of that was due to off-market trades performed last week but only reported yesterday.
Actual on market trade yesterday was fairly muted with brokers saying investors were holding fire until after the Reserve Bank's rate call tomorrow.
Meanwhile, Deutsche Bank economist Darren Gibbs said the news out of Wall St yesterday was "a timely reminder that we're not completely out of the woods yet in terms of where we are with the US economy".
However, Gibbs did not believe yesterday's events were sufficient to drive the cost of wholesale funds significantly higher for local banks.
"It's not the same order of magnitude as some of the other surprises we've had.
"In fact if you look at the kiwi swaps market today, it's up a couple of basis points, pretty small stuff in the scheme of things."