New Zealand stocks rallied yesterday, following some of the heaviest losses seen since the global financial crisis, but experts are warning that both equity and currency markets remain highly volatile.
After shedding more than 8 per cent between Friday and Tuesday, the NZX-50 index rose almost 4 per cent in early trading, before easing to close up 2.78 per cent at 3183.74 last night.
Despite the improvement, market commentator Arthur Lim said low investor confidence remained a serious risk for equity markets, meaning it would only take a little more bad news to spark another round of panic selling.
And the volatility may remain for "years to come", he said, as major economies like the United States struggle to find a solution to mounting sovereign debt and slowing growth.
A statement from the US Federal Reserve yesterday morning had its desired effect of calming investors' nerves, prompting rallies in European and US stocks that flowed on to the NZX and markets across Asia.
For the first time the Fed pledged to keep its benchmark interest rate at a record low until at least mid-2013 to revive a US economic recovery that was "considerably slower" than anticipated.
The Federal Open Market Committee was prepared to employ additional tools to bolster an economy hobbled by weak hiring and anemic household spending, it said in a statement.
The Fed's announcement also helped the New Zealand dollar - which had fallen as low as US79.59c on Tuesday from US88.42c last week. The kiwi hit US84.13c yesterday morning before easing to US83.15c by 5pm.
Westpac senior markets strategist Imre Speizer said the New Zealand dollar was expected to hit US85c within the next few days, stall, and then fall back to below US80c.
"The trading ranges have been just staggering," he said.
Speizer said the Fed's announcement would only trigger a temporary rise in risk appetite - lasting "one to several days" - before markets again began to question the outlook for US growth prospects and a resolution to Europe's sovereign debt crisis.
Beneath the confidence gained from the Fed's statement, markets remained jittery and another bout of panic selling could be easily triggered, Speizer said.
Lim said there was "still a lot of water to flow under the bridge".
"In terms of economic conditions there's a lot the world is going to have to work through over the next few years," he said.
Lim said many NZX stocks had been oversold between Friday and Tuesday night. Brave investors had come into the market yesterday. "A few opportunities have been presented for New Zealand investors who are brave enough to stick up their hands."
Grant Williamson, a director at Christchurch sharebroking firm Hamilton Hindin Greene, said investors should be prepared for more volatility, and be selective in the stocks they bought. "Until there's a medium to long-term solution to those [sovereign debt] issues then the market is likely to remain volatile," he said.
Australia's benchmark ASX200 index rose 106.5 points, or 2.64 per cent, to close at 4141.30 last night, building on the 1.22 per cent gain on Tuesday.
EL&C Baillieu Stockbroking director Richard Morrow said the sharemarket was "historically very cheap if you measure it on a price to earnings ratio basis".
"It's been screaming value for a week and it just got oversold so we are bouncing back quite impressively."
Asian stocks also rose, with Japan's Nikkei 225 closing up 1.05 per cent. Hong Kong's Hang Seng finished up 2.34 per cent.
In early trading last night in Britain, the FTSE 100 index was up 0.39 per cent.
- Additional reporting: agencies