NZ sharemarket set for more trouble after Wall St sell-off

New Zealand share prices look set to weaken further after sharp falls on US and other major markets, although the market reaction may well be less severe.

On Monday, volatility on offshore markets helped drive the S&P/NZX 50 Index down by 188.55 points, or 1.5%, to 12,264.49, a two-and-a-half-week low.

In the opening minutes of trade today, the local index was down 131 points or 1.06% at 12,133.

Overnight, the Financial Times reported Wall Street finished sharply lower, closing out a global market rout where Japan’s main stock index suffered its worst day in 37 years.

Salt Funds managing director Matt Goodson said the world selloff was driven by three factors.

One was an interest rate rise from the Bank of Japan (BoJ) last week and another involved worries about the US jobs market.

The third factor was the rapid cooling of the so-called Magnificent Seven, the tech stocks that have driven much of the US market’s rally over the year, based in investor enthusiasm for artificial intelligence (AI).

Wall Street’s benchmark S&P 500 dropped 3%, its sharpest one-day drop since September 2022, while the tech-dominated Nasdaq Composite fell 3.4%.

The sell-off was broad-based, with more than 95 per cent of stocks in the S&P 500 falling, but large tech companies that had driven much of this year’s earlier market rally were among the worst hit.

Shares in Nvidia fell as much as 15% in early trading, before closing down 6%, the FT said.

Australian sharemarket futures market pricing points to a 0.5% fall when that market opens this morning.

“Both [Australia and New Zealand] markets caught a bit of this yesterday, although our market was down a little lesser degree than others,” Goodson said.

“There is probably some market downside for our market on the day ahead, given the further moves that we have seen in the US,” he said.

Goodson said the biggest factor behind the international rout was the BoJ raising its official rate from zero to 0.25% and signalling it would halve its bond-buying activities.

“What that means is that all these people who have borrowed trillions of US dollars in cheap yen to invest in high-yield assets in the US are suddenly going to have to pay more for those yen,” he said.

“The yen has gone through the roof, so they are going to have to pay it back at a higher exchange rate,” Goodson said.

Japan’s Nikkei 225 hit a record high earlier this year, but took a severe pummelling on Monday. Photo / Getty Images

The second factor, data out last week showing the US jobs market was slowing, raised doubts the US economy would have a soft landing as many had anticipated.

“All of a sudden, people are thinking that this could be a hard landing, although the evidence for this is still ambiguous.”

Third was the big sell-off in US tech stocks.

“So much of the US market has been driven by the magnificent seven [Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla] and that in turn has been driven by the AI story.”

Goodson said some of Wall Street’s big names, such as Goldman Sachs, had been sounding a note of caution about the large amounts of capex currently being sunk in to AI.

“The promise of generative AI technology to transform companies, industries, and societies is leading tech giants and beyond to spend an estimated US$1 trillion on capex in coming years, including significant investments in data centres, chips, other AI infrastructure, and the power grid,” Goldman Sachs said in a report.

“But this spending has little to show for it so far. Whether this large spend will ever pay off in terms of AI benefits and returns, and the implications for economies, companies, and markets if it does – or if it doesn’t – is top of mind,” it said.

Craigs Investment Partners investment director Mark Lister agreed the local market’s reaction was likely to be more muted.

“I believe the local market will hold up better than most of those offshore markets,” he said.

“Our market has under-performed over the last couple of years, so it has not been priced so highly,” Lister said, adding the market was heavily populated by defensive stocks, such as the big power companies.

RBNZ rate cut?

Separately, BNZ economist Stephen Toplis called for “an immediate rate cut” in the Reserve Bank’s official cash rate.

“We strongly believe the Reserve Bank should be easing monetary policy as soon as possible. Indeed, we are on record as having said that it should already have done so,” he said

“Given the lags between rate moves and their impact on the economy, and the current parlous state of New Zealand, we strongly advocate that the Bank starts a progressive easing cycle from the August meeting,” he said.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011