NZX drops on global fears

The New Zealand sharemarket has slipped in the wake of fears of a United States recession and a big drop on Wall Street.

But, as is often the case, the response from local investors has not been as strong as in overseas markets so far. The NZX 50 quickly dropped 1.4 per cent yesterday morning before recovering some ground and was down 1.2 per cent in mid-afternoon trading. Stockmarket darlings A2 Milk and Infratil were both down more than 2 per cent.

US stocks tumbled overnight on Wednesday after an ‘‘inverted yield curve’’ on US government bonds reinforced fears that a recession might be looming.

The Dow Jones Industrial Average and the tech-rich Nasdaq composite index both fell just over 3 per cent – which analyst Morningstar noted was the biggest one-day drop in the Dow since October.

The inverted yield curve means interest rates on two-year bonds issued by the US Treasury are now higher than the interest on 10-year bonds.

That means investors are banking on average interest rates falling in the medium term, which they would generally do when the economy is soft.

The last time the curve inverted was in 2007, near the start of the global financial crisis.

Talk of a possible strong downturn in the New Zealand economy grew last week after the Reserve Bank cut the official cash rate by a larger-than-expected 0.5 percentage points.

National Party finance spokesperson Paul Goldsmith said the cut sounded a dramatic warning that New Zealand’s economy was slowing ‘‘and the Government needs to get serious about growth’’. Prime Minister Jacinda Ardern said the fundamentals of the economy were strong.

While inverted yield curves have usually been followed by economic downturns in the past, and often by full-blown recessions, not all economists agree that will necessarily be the case this time.

The BBC World Service’s economic correspondent Andrew Walker noted ‘‘quantitative easing’’ put in place by central banks in the wake of the global financial crisis could be influencing the shape of bond yield curves and that inverted yield curves ‘‘do not tell us anything about what might be the specific reasons for any impending recession’’.

Grant Davies, an investment adviser at Christchurch broker Hamilton Hindin Greene, said that whenever Wall Street had a big movement down it rubbed off on local investors.

He noted the NZX’s initial 1.4 per cent drop was ‘‘quite a large move down for our market’’ but smaller than in the US.

Part of the conundrum for investors was where to put their money if they did sell shares, he said.

‘‘If investors sell out of highdividend stocks, they don’t know where to put their money at the moment and that is the big concern for investors at the moment; where do you put your money for a reasonable return?’’

Retired people in particular were finding they needed their money to be working hard for them and low interest rates meant term deposits were ‘‘no longer an option’’, he said.

‘‘We have seen a large movement of term deposit funds coming into the market as retail investors chase higher returns and that is certainly underpinning the local market to a large degree.’’

Sharesies co-founder Leighton Roberts said it had been a volatile week for the markets with growing tensions between US and China trade, the protests in Hong Kong and the drop in the official cash rate. But so far, Roberts said, behaviour by Sharesies customers leant more towards buying than selling.

Morningstar said in a bulletin yesterday that ‘‘bleak data’’ from Germany and China was also pointing to a looming recession.