Financial markets were a sea of red numbers last week as the classic 'Fade the Fed' trade played out. The initial reaction to Wednesday's US interest rate decision was neutral to positive, then the selling set in and hardly stopped.

Thursday's mini rally did a very poor job of papering over the cracks in the global economy. On Friday those cracks were wide open for all to see with housing and financial stocks hit the hardest. Barclays (BCS) in particular was back to square one, erasing all gains from the start of the week, as investors took a second look at their fund raising plans in light of Goldman's predictions of further write downs for major western banks. Citigroup (C) was also floored on similar sentiment, falling to its lowest level since 1998.

The Dow Jones Industrial average ended the week down 4.2% and nearly 8% down over the last fortnight. The FTSE faired little better, falling 2.88% on the week and 6.26% over the fortnight. The twin evils of Gold and Oil were again the sectors in demand, as investors looked to profit from further economic turmoil, and hedge their bets against inflation. Oil refused to budge below $130 and set a new all time high of $143. $150 a barrel, scoffed at by some just a few months ago, is looking increasingly more likely and is surely now only a matter of time.

Some positive cheer came with US consumer spending rising as Bush's stimulus cheques hit. While this lift at least created a pause from the continuous stream of bad news, market participants were wary of reading too much into what may be a short term patch for the US economy.

Despite a shortened trading week with Independence Day on Friday the 4th of July, it is a very busy week ahead. Currency markets will be eyeing Thursday's ECB interest rate decision and accompanying statement. The European Central Bank is expected to raise rates by a quarter of a percent to 4.25%. With this starting to be priced in already, market participants will be more interested in the prospects of a string of inflation fighting rate rises from the ECB.

Thursday also sees the all important US Non Farm Payroll data brought forward a day because of the holiday on Friday. This more than anything could have the greatest impact on currency and equity markets for the new month of July. The UK certainly doesn't escape without any top tier data with two lots of house price announcements. Nationwide release their data on Tuesday and The Halifax House Price index is tentatively planned for Thursday.

The news is expected to be dire from both these announcements with Stephen Nickell, the head of the Prime Minister's housing planning unit predicting that the UK housing market won't boom again until 2015. To make matters worse, recent data shows that British households are more indebted than any other country in recorded history. 173% of household incomes are owed in debts. This is higher even than Japan's peak in 1990 that preceded decades of deflation. Barclays added to the gloom by warning their clients to prepare for the financial storm ahead.

While Thursday was an impressive sell off, doubts remain whether the 'puking' point has been reached just yet. Bottom feeders will start to become interested, but the VIX options volatility index is still some way off the January and March spikes. In addition we are not seeing the same flight to safe havens such as short term fixed income, that we saw in the first quarter.

• Sentiment Overview: Stuck in Neutral  »
• Why It's Going to Be a Long Recession  »
• Manhattan Real Estate Is Teetering - Barron's  »
• Bear Market In Its Final Stages?  »
• GSEs Into Conservatorship: Can Housing Stabilize Now?  »

Mike Wright

• Bio & more articles
• Visit author's site