The New Zealand sharemarket flatlined yesterday - having lost 2.1% the day before to a two year low - in response to worldwide markets shedding billions in value during the previous 24 hours trading.
In low volumes worth $44 million, the NZX SE50 closed down 0.19%, while the ASX All Ords index was dragged down by the resource sector to end down 0.34%. Most Asian bourses were trading slightly down yesterday following Monday losses.
While the US Federal Reserve hurriedly papers over the emerging US finance sector cracks, crucial to further investor reaction will be delivery of the financial reports of three major US banks this week and their respective exposure to the US high risk subprime market, and how the global credit crunch is affecting them.
The banks are Lehman Bros, whose shares have fallen 20% in recent days, Goldman Sachs, which has already indicated a likely $US3 billion ($NZ3.76 billion) writedown of subprime associated holdings and Morgan Stanley.
Investors world-wide are fleeing equity markets with rising concerns about the extent of exposure major banks and companies have had to the high-risk subprime US mortgage market.
Both banks and investors have become risk averse, which has prompted a world-wide credit crunch as lenders reassess the risk profiles of borrowers.
Dunedin brokers Forsyth Barr and ABN Amro Craigs agree market volatility is likely to continue and there may be more ‘‘bad news'' to come on banking sector exposure to subprime issues.
The world-wide selling spree was ignited by the firesale and bailout of Wall Street's fifth largest investment bank, Bear Stearns, to third largest US bank JP Morgan Chase & Co for a fraction of its previous value, with the bailout backed by a contentious US Federal Reserve guarantee of $US30 billion over Stearn's assets.
Bear Stearns was valued at more than $US3.5 billion when its shares were above $US170, but a run on its securities by investors - losing $US3.2 billion alone last Friday - saw JP Morgan pick up its shares at $US2, valuing the company at just $US236 million.
In an emergency measure not taken since the Great Depression, the Federal Reserve cut its emergency lending rate to financial institutions by .25 basis points to 3.25% during the weekend to dampen the spooked markets, and analysts are expecting it will today announce a 0.75%-1% cut to its federal interest rate, in an attempt to boost growth amid mounting recession fears.
ABN broker Peter McIntyre described the global selling spree as a ‘‘crisis in confidence'' and expected ‘‘a lot more volatility'' to be reflected in the sharemarkets.
The Bear Stearns near collapse was an example of the significant debt being carried by many companies in the financial sector ‘‘who have been caught out taking a punt on the [highrisk] subprime,'' he said.
‘‘Two months ago, people thought the worst of the subprime problems had come to an end. But it looks like there will be more to wash out yet.''
Forsyth Barr investment adviser Ken Lister said the reports of Lehman, Goldman Sachs and Morgan Stanley would be keenly scrutinised by investors, as will the tone of the Federal Reserve announcement on lowering interest rates.
‘‘The fact that the [Federal Reserve] is prepared to act to avert a crisis is very encouraging. Without that we could go anywhere,'' he said.
He believed there ‘‘may be more to come'' on subprime disclosures, but market volatility would remain, noting the US share index had regained some traction to Monday's losses, as had many of the Asian based bourses.
Mr McIntyre predicted unless more cash was injected into the banking sector, US shareholders - and ultimately those elsewhere around the world - would sell off bank stock in preference of the resource (mining, gold and other metals) sector.
