Interest.co.nz's Bernard Hickey gives his perspective on how the overnight plunge in world sharemarkets is impacting New Zealand.
KEY POINTS:
The New Zealand dollar fell to a two-year low of US62c overnight as global markets slumped as much as 9 per cent and appetites for risky commodity driven currencies such as ours and Australia's evaporated.
The New Zealand stock market is expected to open 3-4 per cent weaker
as international investors look to sell and repatriate cash home.
The Reserve Bank is likely to cut the Official Cash Rate by 50 to 100 basis points on October 23, or earlier, so it can give New Zealand's banks some breathing space to cope with much higher international funding costs. That may mean fixed mortgage rates don't fall much after the rate cut, but the Reserve Bank will want to stop them from rising.
An emergency cut is not likely at the moment given our banking system and financial markets are not as stressed as those in Europe and North America, but if things deteriorate further it is a possibility.
Overnight, Britain's FTSE 100 fell 7.9 per cent, its biggest slump since the 1987 crash, while European stock markets fell as much as 9 per cent and America's Dow Jones Industrial Average was down more than 6.5 per cent to a four year low near the close in New York.
The Dow closed down 363 points at 9,962, or 3.5 per cent, as investors made a last ditch attempt to close above 10,000. At one stage in New York afternoon trade the Dow was down 800 points or nearly 8 per cent at 9,525.
Panic swept the Northern Hemisphere markets as concerns about the banking systems on both sides of the Atlantic multiplied along with fears about a deep economic recession.
Most of the bad news is coming from Europe, where its banking crisis worsened dramatically over the last 48 hours. The rescues last week of Dutch/Belgian giant Fortis and German's second largest mortgage bank, Hypo Real Estate, collapsed aimd acrimony between governments and the private sector late on Sunday. Holland unilaterally tore up the Fortis rescue and nationalised Fortis' Dutch banking arm to save itself.
Germany's commercial banks withdrew in fright from the Hypo bailout when it became clear upon inspection of its books that its funding hole was deeper and darker than expected.
Only a German government promise to front up with as much as 50 billion euros and a promise to safeguard personal deposits in all banks stopped runs on banks in Europe's largest economists.
The shock decisions by Ireland and Greece to give government guarantees for their banks' deposits has destroyed any hopes of a pan-European response to the credit crunch and pushed the euro sharply lower.
The strong US dollar, ironically because America is seen further along the Credit Crunch path and closer to recovery, underpinned the slump in the New Zealand dollar to its lowest point since August 2006.
Meanwhile the oil price fell US$6 a barrel to US$87 a barrel as concerns grew about demand in a recessed global economy.
But unfortunately for New Zealand drivers the slump in the New Zealand dollar means further cuts in petrol prices is unlikely.
At 62 US cents and US$87 a barrel, interest.co.nz calculates the price of regular petrol would be around NZ$1.92/litre, assuming tax rates and oil company profit margins don't change.
- INTEREST.CO.NZ