NZ shares tumble as traders eye potential US rate hikes

New Zealand shares dropped sharply across the board, tracking global moves, as jittery traders eye potential interest rate hikes in the US.

The benchmark S&P/NZX 50 Index shed 1.9 percent to 7,326.79 by late morning, its lowest level in almost a month. The decline was broad-based, as 49 stocks fell, just one was unchanged and none gained.

Stocks across the globe declined on Friday after Boston Federal Reserve President Eric Rosengren signalled the Fed may be preparing to hike interest rates in the world's largest economy as early as next week, commenting in a speech that the US central bank faced increasing risks if it waited too much longer. A US rate hike would provide an alternative investment option for traders, stemming the flood of money that has been flowing into equities during a period of historically low interest rates, investors said.

"Everyone is taking the lead out of the US predominantly. Everyone has got their eyes on the Fed and whether they will or won't commence the tightening phase," said Rickey Ward, NZ equity manager at JBWere. "The market feels a little bit jittery on the back of that. It's just a reflection of unsettledness."

The Chicago Board Options Exchange Volatility Index, or VIX, rose to 17.52 on Friday, from 12.6 the previous day to reach the highest since late June when it peaked at 26.72. The index is constructed of implied volatilities of S&P 500 Index options and is known as the investor 'fear gauge'.

Ward said the decline in the NZX todayreflects that global equity markets are trading at elevated earnings multiples compared to historical levels, as investors searched for returns in a low-interest rate environment, he said.

"What we've got at the moment is global markets where you have had a flood of money come into it post-GFC as central bank policies were all about stimulatory measures and that money has had to go somewhere. It's tended to go into equity markets because fixed-interest markets were producing very poor returns. Markets have had a pretty healthy run and you really are paying for earnings yet to be attained. Now you might have the potential of something else."

Ward said the biggest impact on the local market today was likely to be felt by stocks which had higher overseas ownership as domestic investors failed to soak up the selling demand of offshore investors.

Over the longer term, higher interest rates in the US would impact New Zealand companies through changes in currency rates and the resultant impact on the local economy.

Still, Ward said the local market was dominated by high income generating investments and was most likely to flatline.

(BusinessDesk)

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