The ASX is set to break through 5900 today. Credit:Peter Braig It comes towards the tail end of a disappointing reporting season for Australia's top companies. "It's like a perfect storm – a lot of things that could have gone wrong have gone wrong," AMP Capital chief economist Shane Oliver said on Sunday. "We are caught in a negative feedback loop, with falls in the Chinese sharemarket feeding into weakness in Europe and the US, and then Asian markets fall again in response to that." Manufacturing data from China, which was worse than expected, added to fears about whether China's economy can meet the 7 per cent growth target set by its government.

Fears stemming from China's volatile sharemarkets also returned to the forefront after the closely watched Shanghai Composite Index fell 11.5 per cent for the week, a total of 32 per cent down from its June record high. Oil has also been caught in the global economic storm, with US crude prices dipping to a near seven-year low of less than $US40 a barrel. It comes as US producers ramp up their supply despite a glut, with slowing demand from China, the world's second biggest oil consumer, adding to concerns about China's growth. Heavy selling in US oil companies were also responsible for pushing Wall Street down on Friday. The benchmark S&P 500 index fell 5.8 per cent, its biggest weekly loss in almost four years. Dr Oliver said a response from Chinese authorities would be the circuit breaker needed to stem the selling.

He said China had a habit of surprising the market, including when it relaxed its grip on its currency, allowing it to fall against its previous pegging to the US dollar. That move caught investors by surprise, sending the ASX into a so-called correction, or a 10 per cent drop from its April high when the local bourse was nudging 6000. Last week's bombing in Thailand and renewed hostilities between North and South Korea have also added to a downturn in emerging markets, whose currencies have been on a steep decline. Dr Oliver said Australia's growing dependence on the emerging world was adding to the confusion for investors as to the longer term consequences, given China's reduced demand for Australian commodities has companies looking to other countries. The conspiring events sent global markets into a tailspin last week, with European and US indices falling into corrections and Hong Kong's Hang Seng fell into a bear market, down 20 per cent from its April high.

But CommSec chief economist Craig James said rather than a wave of panic, the markets were recording orderly declines from unsustainable highs. "The valuations just got too high," he said. He said the bloated markets had tipped into an "orderly correction", and would return to more sustainable levels. "This has happened in the past; between July and October last year when the market fell by about 10 per cent within four months we had markets up at the highs again," he noted. Concerns over China were unjustified because market watchers were too concerned about manufacturing data when the bulk of China's growth came from the service sector.

But he said longer term investors should brace for a comeback. "What we're likely to see as the week goes in is the bargain hunters will move back in and realise there's longer term value for the market," Mr James said.