Sharemarkets’ recovery hits a ‘screeching halt’
International financial markets’ headline-defying run of good returns came to an end on Thursday night and there were early signs that the New Zealand market was following suit yesterday.
The NZX50 was down 3.91 per cent at 10.35am, dropped further through the morning before recovering to 3.26 per cent down at midday.
Yesterday, ASB economist Mike Jones said a share market rally through recent weeks, which took the Nasdaq index to a record this week, had come to a ‘‘screeching halt’’ overnight.
The Dow Jones Industrial Average sank more than 1800 points and the S&P 500 dropped 5.9 per cent, its worst day since mid-March, when stocks had several harrowing falls as the virus lockdowns began.
Many market watchers have been saying that the comeback in the market since late March was overdone and did not reflect the dire state of the economy. The S&P 500 rallied 44.5 per cent between late March and Monday, erasing most of its losses tied to the pandemic.
The selling comes as coronavirus cases rise in the US, with some of the increase likely tied to the reopening of businesses and the lifting of stayat-home orders. Cases are climbing in nearly half the states, according to an Associated Press analysis.
Jones said the VIX index, a proxy for risk aversion, jumped to 33 per cent, and bond yields and commodity prices had also been caught up in the general souring in sentiment. ‘‘US and German 10-year bond yields have fallen 5 to 8 basis points and oil prices are off almost 8 per cent.’’ He said the drop could be a correction of stretched markets.
‘‘US data released overnight were actually a touch better than expectations. Weekly jobless claims supported the idea that the worst is behind us for the labour market.
‘‘New claims fell 355,000 from the prior week to 1.54 million. Analysts had expected 1.55 million.’’
Milford Asset Management portfolio manager William Curtayne said the market rally since March was against poor economic data as investors were already bearishly predisposed and cautiously positioned. ‘‘This meant the market reacted to the positive developments of improving virus cases and reopening economies rather than longer-term risks such as sluggish economic recovery or the possibility of a virus second wave.
‘‘The sell-off happened because investor positioning reached some kind of inflection point. News of a possible second wave of infections in the US, and a lack of additional fuel from the US Fed, appears to have been enough to tip the market over. In our opinion, the bad news this week differs little from news over the last couple of weeks such as US riots.
‘‘The difference is that investor positioning has become bullish enough to react to bad news again.’’
He said the market should be driven by fundamental news over the coming weeks and months.
‘‘If virus cases in the US continue to worsen, or second waves emerge in Europe, this could drive a continued decline. The economic data will also be a driver.
‘‘The market will be trying to determine whether we have a fast recovery to pre Covid-19 levels or is this likely to be a drawn-out economic downturn. And if you find yourself getting too bearish, remember we will eventually see supportive comments from central banks if the decline goes too far.’’
Additional reporting: AP
Many market watchers have been saying that the comeback in the market since late March was overdone.