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Nervous US markets hinge on China's next step

If China stabilizes, U.S. markets will breathe a sigh of relief.

"Because the U.S. is the only major economy that shows some major level of growth, if the contagion in Asia is somewhat limited it will not hurt the U.S. economy," said Dan Veru, chief investment officer at Palisade Capital Management. "I can't come up with a scenario where our dollar is not pointed to as a safe-haven currency."

He sees two potential supports for the market: A delayed rate hike by the Federal Reserve and significant stimulus from the Chinese authorities.


"Maybe they're putting something quite large in place. They have a lot of dry powder," Veru said. "If that happens then you'll see a substantial short-term rally."

U.S. stock index futures opened higher Monday evening after the major indices followed global markets lower but closed off session lows.

"When it is clear that the recessions aren't approaching, the market bounces back," David Kelly, chief global strategist at JPMorgan Funds, said in a note. "This should be the case this time, with very strong household and corporate balance sheets, a boost from low oil, plenty of pent-up demand for housing and capital equipment, improved government budgets and good momentum in the job market."

Read More Traders look to China to stop meltdown

He expects "a solid upward revision" for Thursday's revision on second-quarter GDP. U.S. GDP growth remains moderate, with the first read on second-quarter growth coming in at 2.3 percent.

Analysts estimate China is growing at a 4 to 6 percent annual rate (versus the headline 7 percent print), which they say is a necessary slowdown as the country transitions to a service-oriented economy from a manufacturing base.

"China has been growing too fast," said Francis Cheung, head of China-Hong Kong strategy at CLSA. "That's really been driven by a stimulus. We are at the beginning of this transition."

Nicholas Lardy of the Peterson Institute pointed out that the shift towards urban living and consumerism is helping grow jobs and incomes far more than the old Chinese industrial drivers.

"Thirty percent of household consumption was on services," he said. "That's what is driving the service sector and driving more rapid growth in non-agricultural employment."

However, the global fallout in stocks still hinges on China growth fears. The country's surprise move in mid-August to devalue the yuan triggered declines in emerging market currencies and exacerbated concerns of slowing growth in the world's second-largest economy. The U.S. dollar is up more than 5.5 percent year-to-date against the offshore yuan.