Aftershocks from Wall St rattle NZ

After a welcome few weeks of relative calm and even some solid gains, the New Zealand dollar and sharemarket were once again sold off heavily yesterday after a torrid session on Wall St.

With US stocks sliding more than 3 per cent after weak results from Bank of America reignited fears about the state of the banking industry and the economy, Asia Pacific markets including the NZSX followed suit. The NZX-50 index closed down 33.94 points, or 1.26 per cent, lower at 2664.86.

In Australia, the ASX-200 closed down 2.43 per cent at 3677.4.

The New Zealand dollar, which last week appeared to have broken free from its tight correlation with US equities by falling as US stocks rose, was again coat-tailing the Dow.

It closed at US55.67 yesterday, down 5.4 per cent on a week ago.

"As global equities plunged, all the rose tinted glasses and half-full champagne flutes were all crushed underfoot as investors ditched growth-sensitive currencies like New Zealand dollar in favour of the relative safety of US dollar and Japanese yen," said BNZ currency strategist Danica Hampton.

But while Hampton said yesterday's falls in the local currency were largely linked to risk aversion, she noted downward pressure on interest rates was also contributing to the case for a weaker kiwi.

Meanwhile, Earl White of BanCorp Treasury Services said the kiwi's sudden move lower had probably cleaned out a lot of optimistic speculative positions and so subsequent moves would hopefully be more restrained.

"We may have had the initial scare, so we'll still follow the general direction but I don't think the moves will be so severe. It could go either way but I think the volatility will dampen down a little bit now we've seen the big move."

However, Bank of America's results were seen as a potential indicator of yet more pain to come for US banks, and in turn global equities and riskier currencies like the kiwi.

Although it reported a rise in profits, the bank's shares plunged 24.3 per cent. Its earnings report, showing a marked deterioration in credit quality, raised questions about the sustainability of recent better-than-expected results from other financials.

Yesterday's tumble was broad-based and follows a six-week winning streak, the longest for the S&P 500 since 2007, with the Dow scoring its biggest gain over the period since 1938.

"We had started to believe that there was light at the end of the credit crisis tunnel and a lot of the wind got taken out of the sails," said Hugh Johnson, chief investment officer of Johnson Illington Advisers in Albany, New York.

The Dow Jones industrial average dropped 289.60 points, or 3.56 per cent, to 7841.73. The Standard & Poor's 500 tumbled 37.21 points, or 4.28 per cent, to 832.39.

The Nasdaq fell 64.86 points, or 3.88 per cent, to 1608.21.

AROUND THE WORLD
NZX-50: -1.3 per cent
ASX-200: -2.4 per cent
Nikkei: -2.4 per cent
Dow Jones: -3.6 per cent
FTSE-100: -2.5 per cent

- AGENCIES