World market turmoil: NZ shares open lower

UPDATED: NZ shares decline but sell-off less severe than overseas

Local investors and fund managers are braced for what could be the biggest drop in share prices this year as world market turmoil continues.

The New Zealand share market fell this morning in response to the weakness on overseas markets last week.

By 11am, the benchmark NZX50 index was down 113 points or 1.84 per cent at 6054.

Wall Street tumbled 390.9 points on Friday and is down 8.2% so far this year on concerns a further decline in the Chinese economy and weak US shopping data in December.

US markets are closed today for the Martin Luther King Day and the three-day holiday weekend at a time of falling international markets added to investor nervousness.

The Dow Jones Industrial Average closed at 15,988.08, the first time since August 25 that it has dropped below 16,000.

This occurred after the New Zealand market finished the week on a high at 6169 on the S&P/NZX 50 index.

Oil prices continue to fall
Elsewhere, the Chinese market is down 18%. Energy shares have led the worldwide drop, reflecting reduced demand for oil, which has fallen below $US30 a barrel in the US.

Oil has fallen 20% this year and is off 52% from its 2015 peak.

Low oil prices have resulted in a supply glut, which will be exacerbated by the lifting of sanctions against Iran.

But it is the situation in China that has dominated thinking among market analysts. China has borrowed huge amounts to stimulate its economy, leading to serious overcapacity in everything from factories to luxury apartments.

This has fuelled concerns of a hard landing in the Chinese economy, one of the main drivers of world economic growth.

Although the US is slowly recovering, investors have turned their attention to how it might be affected by overseas events.

Some say this could lead to a rerun of the 2008 global financial crisis. But others point out this was caused by heavy indebtedness and this is no longer a feature of the US economy.

Household debt is well below 2007 levels, when borrowing equalled 130% of income. Today that is down to 103% as of last year’s third quarter.

Further, super-low interest rates mean households are now devoting 15.3% of income to meeting debt and other financial obligations versus 18.1% in 2007.

Banks are also in a far better position to absorb losses than during the global financial crisis.

Countering this is the lack of monetary or other tools to stimulate the economy.

So investors have sought safe-haven assets, including US government bonds, which have dropped to below 2%, and gold, which surged 1.6% on Friday to $US1091.50 an ounce.

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