Investors hold their breath as major banks ponder next move

Worries about the state of the global economy and how soon policymakers will respond were centre stage after a survey of around 7,000 German firms showed Europe’s fiscal crisis and a slowdown in China were taking a toll on the region’s biggest economy.

“The euro crisis is gnawing away at German growth,” said Klaus Wohlrabe, an economist for the Ifo Institute, which compiled the survey that found a majority of firms rated their export prospects as “negative”.

“It looks as if the German economy will, at best, be treading water in the coming months,” Carsten Brzeski, senior economist at ING said.

A market holiday in London thinned some stock trading. MSCI’s world equity index was steady at around 324.27 points by Europe’s midsession following five weeks of gains on expectations that major central banks would soon act to tackle the slowing global economy.

This view got a boost yesterday from Chicago Federal Reserve Bank president Charles Evans who said, in remarks prepared for delivery in Hong Kong, that the Fed should start a new round of monetary stimulus immediately, buying bonds for as long as it takes to produce a steady decline in the jobless rate.

However, risk assets such as equities were expected to stay in a tight range this week as investors watch for clues on the next steps to tackle the eurozone’s debt crisis, and wait to see what emerges from a gathering of central bankers at Jackson Hole, Wyoming on Friday.

European Central Bank chief Mario Draghi signalled earlier this month that the bank may start buying government debt to reduce crippling Spanish and Italian borrowing costs, comments that fuelled a broad-based upturn in sentiment on global markets.

However, over the weekend German Bundesbank chief Jens Weidmann likened the ECB’s bond-buying plans to a dangerous drug, pointing to growing unease over the policy.

Markets have also been unsettled by rising talk of a Greek exit from the eurozone which has bubbled up again in recent days.

With the ECB’s next policy meeting not until September 6, attention is now on Friday’s central bankers’ meeting, and a speech that day by US Federal Reserve chairman Ben Bernanke.

Talk of a more accommodating monetary stance from the Fed has grown since data showed the United States is struggling due to the eurozone crisis and a slowing Chinese economy.

The speculation has helped the FTSEurofirst 300 index of top European shares rise by about 7 per cent in August, while the S&P 500 index is up around 2.3 per cent.

Yesterday, gold was at its highest levels since mid-April, at around $1,676.45 an ounce, due to the strength of the view that a further monetary easing from the Fed is imminent.

Oil has also risen sharply, with Brent climbing above $115 per barrel, although it was also given a lift from supply concerns as Tropical Storm Isaac threatened to interrupt most US offshore oil production in the Gulf of Mexico.