Stockmarkets in New Zealand and across Asia continued to fall as investors struggled to come to terms with the implications of a looming end to US money printing and a shift in Chinese economic policy.
The NZX-50 Index had its fourth straight day of losses yesterday, finishing close to a three-month low after dropping 0.8 per cent, on top of a 1.1 per cent fall on Thursday. Mighty River Power hit a new low of $2.20.
The fallout from the US Federal Reserve's heavy hint that it would soon start to wind back its economic pump-priming has been stronger than many expected.
Concerns about a slowdown in China and a temporary squeeze on cash in the republic's banking system also weighed on sentiment, but the prospects of the Fed taking its low interest rate "punch bowl" away from the party was seen as the main driver of sentiment.
The Dow Jones has fallen sharply since the announcement from Fed chairman Ben Bernanke to the effect that the Fed could soon start winding back its US$85 billion-a-month bond-buying stimulus programme late this year and end it by mid-2014.
US bond prices jumped to their highest levels in more than a year and, despite the Fed's reasoning that the US economy was strengthening, investors took it as bad news for the easy money that has helped power US markets to record highs this year.
David Stanley, director of equities research at Woodward Partners, said US interest rates had been "unnaturally low" after three bouts of quantitative easing by the Fed, which had helped propel investors towards higher yielding shares.
"Equities have had a higher yield in recent times than bonds so it has contributed to a quite strong performance of the US equities market in the first four months of the year, which has flowed through to other markets around the world," Stanley said. "Quantitative easing has depressed interest rates and pushed up bond prices, which has then redirected people to equities.
"Now what you are seeing is the unwinding of that."
Shane Solly, portfolio manager at Mint Asset Management said many investors had borrowed money to invest in higher yielding securities. Now, investors faced prospects of US interest rates rising.
In China a squeeze on credit that is rattling world markets appeared to ease yesterday as a key interbank interest rate fell slightly, prompting speculation the country's central bank may have intervened to calm ravaged nerves.
But analysts say the spike in the rates that banks in China charge each other for short-term borrowing is part of a deliberate, belated effort to trim off-balance-sheet lending that could threaten financial stability.
Coming at a time when uncertainty over China's economy has sharpened as growth has slowed, the credit crunch is having an outsized impact on markets that already are jittery over US plans for "tapering," or scaling back massive monetary easing as conditions in the US improve.
But interbank lending rates play a less important role in China than in the US and Europe, says Yi Xianrong, an economist at the China Academy of Social Sciences.
Mighty River Power closed down 6c at $2.20, 30c below its issue price.
Solly said the possibility of a Labour-Green redesign of the electricity market hung "like the sword of Damocles" over the stock. However, he expected renewed investor support to emerge once Mighty River is included in the NZX's major indices.