After a torrid trading week that saw more than $30 billion wiped off local stocks and the Australian dollar slide further, investors will be hoping for some economic cheer from China this week to offset further confirmation that Australia's resources boom is winding down.
Futures markets were anticipating a six-point drop in the headline S&P/ASX 200 today, which would leave the index down almost 5.1 per cent from last week's highs.
Justin Fabo, a senior economist at ANZ, said local markets had been gripped by a "pretty negative mood", which last week's surprise drop in consumer confidence for May reinforced, despite the latest interest rate cut.
"All eyes should be on this week's updated mining investment outlook for next year," Mr Fabo said, referring to the ABS's quarterly survey of investment intentions due out Thursday, which is expected to show more scaling back in mining investment plans.
Recently returning from Western Australia and Queensland, Mr Fabo said growing gloom about mining services companies was justified.
China's official PMI is expected to drop to 49.9 in May from 50.6 in April, which would confirm the shock fall in HSBC's PMI estimate, which suggested last week that Chinese manufacturing output was contracting for the first time since October.
Tim Baker, an equity strategist at Deutsche Bank, said the local market's fall below 5000 brought the Australian index back to around fair value.
"The index's forward PE ratio is around 14 now, which looks fair, rather than cheap, relative to history," Mr Baker said.
"Any rally from here would be dependent on improving earnings growth, which has proved disappointing of late."
Paul Bloxham, HSBC's chief economist, said changing perceptions about the US economic outlook had underpinned the slump in Australia's equity market and currency, which had tumbled more than 7.3 per cent since its mid-April highs on a trade-weighted basis.
Against the US dollar, the local currency lost almost US2c last week and was trading around US96.5c in global markets at the weekend.
"It's typical of the Aussie: it goes up via the escalator and down by the lift," Mr Fabo said.
Mr Bloxham said loose US monetary policy had been helping boost equity prices, including Australia's, and that any hints of a Federal Reserve withdrawal would undermine stock prices.
"We've been wondering for a while now how markets would react to the end of quantitative easing and we saw last week," he said, referring to confusing signals from the Fed suggesting its $US85 billion ($87.99bn) a month bond buying program might be wound back soon. Mr Bloxham said economic rather than financial data, especially from the US, would increasingly drive prices in financial markets because the Fed's policy stance was linked to the health of the real economy.
Having just returned from the US, he said US businesses were very cautious about the pace of the economic recovery there.
Economists think further rate cuts in Australia are unlikely because the weaker dollar will put pressure on inflation and ease the strain on Australia's exporters.
"The ideal would be no more rate cuts and a lower currency," said Mr Fabo, who is nevertheless anticipating another quarter-point cut this year.
