Investors could be in for a bumpy ride this week after fears about US interest rates sparked a return to volatility following a long period of market calm.
The S&P/NZX 50 index plunged 2.5 per cent today to close at 7279.76 in a savage sell-off that followed on from Wall Street's rout on Friday.
Late today, the New Zealand sharemarket was the hardest hit in Asia apart from exchanges in Hong Kong and mainland China.
It was an even bigger plunge for the NZX 50 than the last major sell-off, on June 24, when Britain sent financial markets into a panic when it voted to exit the European Union.
The local benchmark index closed down 2.3 per cent following the so-called Brexit referendum.
The return of volatility - driven by concerns the US Federal Reserve may begin hiking interest rates sooner than expected - ended the calm that had enveloped markets since late June, following the recovery from the Brexit shock.
The Chicago Board Options Exchange Volatility Index, known as Wall Street's "fear gauge", rose above 17 for the first time in 50 trading sessions on Friday, according to Bloomberg.
Jitters spread through markets after Boston Federal Reserve President Eric Rosengren said the US central bank faced risks if it waited too long to hike rates.
That prompted fears that the US Federal Reserve may raise rates when it meets next week.
As of Friday, markets were pricing in a 30 per cent chance of the Fed hiking rates this month, up from 24 per cent a month ago, Bloomberg reported.
Markets were nervously awaiting a speech by US Federal Reserve Governor Lael Brainard, scheduled to take place today.
Low and even negative interest rates and bond yields have been pushing investors toward stocks, especially those that pay solid dividends, helping to perpetuate an equity bull-run now well into its seventh year in New Zealand and the US.
Major local stocks that have benefited from that dynamic - including Auckland Airport, Air New Zealand and Meridian Energy - saw some of the steepest falls today.
Mark Lister, of Craigs Investment Partners, said the NZX had been one of the best- performing equity markets in the developed world so it "made sense" that it would get sold off more heavily than others.
The NZX 50 remains up 15.1 per cent in the year to date, despite today's losses.
The New Zealand market also had "more to lose" from rising interest rates because it had benefited so heavily from the hunt for yield by income-seeking investors, Lister said.
Harbour Asset Management portfolio manager Shane Solly said there was potential for markets to see a few more days of volatility.
"We have been highlighting that the New Zealand market is pretty fully priced for a while," Solly said. "It's not a surprise that people are taking some profits."
Stephen Bennie, of Auckland fund manager Castle Point, said stocks had been trading in a "remarkably tight range" for some time.
"Ever since they recovered from Brexit they had been in this flat-line period," he said.
"When you get that type of situation, the next move is often quite impulsive ... and it went sharply lower."