China fears, global growth doubts grip markets

Markets are watching for China's next move as signs of a slowdown in the world's second-largest economy stack up, raising expectations it will act to stoke growth.

A looming snap election in Greece and a closely watched conference hosted by the Federal Reserve in the United States are also likely to keep investors on their toes in the coming week, in particular as they look for hints on when the US will raise interest rates.

Fears that Chinese growth is weakening, dragging down the global economy with it, are hammering commodities and stocks.

Alarm bells rang out across world markets on Monday as a 9 per cent dive in Chinese shares and a sharp drop in the dollar and major commodities panicked investors.

Read: KSE plummets by 1,300 points during intra-day trading

On Friday, a survey showed Chinese manufacturing slowed the most since the global financial crisis in 2009 - adding to other worrying clues about the country's health, including its falling exports.

China devalued the yuan earlier in August by pushing its official guidance rate down 2 per cent.

The central bank has said there was no reason for the currency to fall further, but investors are also bracing for further interest rate cuts.

“It will be all eyes on the Chinese authorities for any further policy support steps, alongside the People's Bank of China yuan fixings and trading swings," analysts at Investec Economics said in a note to clients.

China is also widely expected to relax reserve requirements ratios for its banks again in the coming months, a measure intended to spur lending by reducing the cash they need to hold.

Read: Market watch: Tracking regional peers, index sheds 700 points

It is trying to keep its economy on course to grow 7 per cent in 2015 - its slowest pace in a quarter of a century.

"We continue to expect a total of 100 basis points of reserve requirement ratio cuts by end-2015, with the first cut likely to take place within the next two weeks," economists at Standard Chartered said.

The cash reserves ratio has already been cut three times this year.

Eyes on Fed, Greece

By the end of the coming week, attention may shift away to the Rocky Mountains, where policymakers are due to gather from August 27-29 for the Fed's conference of central bankers, finance ministers, academics and financial market participants in Jackson Hole.

Fed chair Janet Yellen is not expected to attend, raising the prospect that other Fed officials may be more tight-lipped about the likelihood of the first rate increase in almost a decade, some analysts said.

The prospect of an increase as soon as September is receding, however.

Read: Weekly review: KSE-100 plunges 1,417 points as foreigners offload

Last week the Fed released minutes of its July meeting, giving no clear signals as to the timing of such a move – which would affect markets across the world and could cause more pain for emerging market assets, already being hit by China's woes.

Though they were more confident about U.S. growth prospects, the minutes showed, Fed policymakers are concerned about weakness in the global economy - fears likely to have been heightened by Monday's market rout in which the dollar also fell sharply.

Further clues on both matters should be gleaned from data releases in the coming week, including second-quarter US gross domestic product figures due on Thursday.

Quarter-on-quarter growth in the period is expected to be revised upwards to 3.2 per cent from 2.3 per cent, according to a Reuters poll. In the euro zone, investors will be looking at an German economic sentiment survey due on Tuesday for a better idea of the scope of the bloc's recovery.

Read: Market watch: Index feels the heat as panic envelopes investors

Preliminary August consumer price readings for Germany and Spain on Friday will provide further insight into how effective the European Central Bank's bond-buying efforts have been at warding off deflation.

But the spotlight will mainly fall once again on Greece, where Prime Minister Alexis Tsipras has resigned.

That opens the way for early elections after he secured much-needed funds in the country's third international bailout programme.

The current Greek government aims to strengthen its position in the election after accepting a rescue deal it once opposed.

But that creates more uncertainty for markets already on edge over whether Greece will deliver on promised reforms and get its economy and banks back on track.