22 Sep 2008

NZ market up, dollar steady on news of US bailout

6:34 pm on 22 September 2008

The New Zealand sharemarket was up 2.2% towards the end of trading on Monday as investors greeted moves by the United States government to fix the mortgage debt problem.

The NZX 50 index was up 66 points, and the dollar held its ground at about US69 cents throughout the day.

Blue-chip stocks such as Contact, Fletcher Building and Telecom were the main beneficiaries as investors remained wary of riskier stocks.

At one stage the market was up nearly 3%, but these gains were pared back as futures markets showed Wall Street falling when it opens later.

Volumes on the local market were light as investors initially restricted their purchases to market heavyweights and avoided stocks in expansion mode or with high debt levels.

The New Zealand dollar held on to most of Friday's gains against the US dollar as international investors dumped the greenback in favour of other currencies as they regained their appetite for risk.

The US government announced a $US700 billion rescue package at the weekend, which includes a proposal to buy back a large proportion of the bad debt in the American mortgage market. The fund would hold the debts until they can be sold off in the future.

Investors, buoyed by the news of a possible end to the credit crunch, sold off the US dollar and moved back to other currencies over the weekend.

Government stock prices reversed last week's gains, and commodities also found support, helping to underpin the New Zealand and Australian currencies against the US dollar.

However, ANZ economists say further volatility cannot be discounted as details of the US government bailout are revealed.

The proposal still has to be approved by the Congress and if the US government does not pay enough to take toxic mortgage debt off banks' balance sheets, there could be further write-downs.

Secretary of the US Treasury Henry Paulson urged Congress to quickly pass the financial rescue plan.

Mr Paulson says it will not cost the US taxpayer much and he is doing the best he can.

Republican and Democratic lawmakers say they hope to pass a version of the package by the end of this week. However, opposition Democrats say it must include protections for homeowners, and provisions to guard against potential abuses, such as excessive executive compensation.

US fund 'good strategic move'

On Friday, the Reserve Bank moved to ensure there was sufficient cash in New Zealand's financial system.

Andrew Kelleher, from ASB Securities, told Morning Report he expected there would be some relief buying from investors on Monday.

Mr Kelleher says the central bank's move to ease up liquidity constraints should allow New Zealand banks to get through the credit crisis.

NZX chief executive Mark Weldon also expected a positive start to the business week. He says establishing the US fund is a good strategic move that will return some confidence to global capital markets and go some way to curb share-selling in New Zealand.

"It has shored up some of the more risky positions globally so that means investors who've been haemorrhaging money and having to liquidate assets including New Zealand assets will not have to do that.

"So that will stop some of the selling we have seen in New Zealand over the last week."

Mr Weldon says the rescue fund will also stem flow-on effects into Asian economies, which are crucial to New Zealand.

News of the sweeping rescue plan spurred a huge rally on the US stockmarket on Friday, shooting up nearly 4%. European shares surged 8.2%. In London, the FTSE 100 closed up 8.84%.