Adding to the gloom, major US blue chip companies, Intel and Time Warner both posted earnings that fell below analysts’ estimates. Wal-Mart also surprised by lowering its fourth quarter outlook. Analysts are concerned that if the world’s largest retailer had its figures set too high, then there is the real risk that earnings estimates are still too high across the board, going into earnings season. In short, the fear is that the bad news hasn’t yet been priced in, a scenario which is hardly going to be a positive catalyst for the next few months.

On the currency markets, it was a rare strong week for the pound. Sterling raced further away from parity against the Euro, and is pushing towards the $1.5000 level against the US dollar. Traders repositioned themselves after the bank of England cut by ‘just’ 50 base points, while at the same time speculation grew that the ECB will have to ease their relatively tight monetary policy soon. Traders now doubt that the Euro zone will be as strong as many thought this year. The British and American economies are still on the sick list, but now it is becoming apparent that struggling European nations such as Italy, Spain, Ireland and Greece could force the ECB to cut rates. The coming week is relatively quiet, starting off with Bernanke speaking on Tuesday. US retail sales come on Wednesday, with PPI and unemployment claims to follow on Thursday.

Last week’s announcement that the US was officially in recession was a bit of a non event. A recession has been in train for both the UK and US economies for some time, but optimism or fear over its severity has been waxing and waning over recent weeks, as world governments released various stimulus packages. Last week was certainly not for the optimists, with investors flying to the safety of US Treasuries, pushing the benchmark yield down to record lows. Friday’s Non Farm Payroll numbers confirmed what many Americans are already experiencing – the number of people in private employment is falling. Like readily available credit, jobs are being squeezed on both sides of the Atlantic.

The latest UK purchasing managers’ survey showed that UK manufacturing fell at a record pace in November. The falls mirror similar record declines in US manufacturing which also contracted the most since 1992. The outlook for the UK in particular looks grim, with mortgage lending falling to near record lows. The poor manufacturing data and dramatic interest cuts sent the pound sharply lower against most major currencies. Last week, the pound hit 0.87250 ( euros to pounds ) against the Euro, its lowest level since the introduction of the European single currency – not great news for travelers but good for those of you holding euro assets.

Demand for US Treasuries shows no signs of stopping. In addition, sovereign credit default swaps have gone through the roof, reflecting both the cost of the planned stimulus packages and the growing severity of the global recession. At the start of the year, Credit default spreads for the UK were just 8.9. Last week they moved higher than 125, meaning it would cost $125 to insure a $10,000 sovereign investment. Germany currently has the lowest CDS levels, while Argentina has rocketed to over 4,000. Russia is also elevated with CDS levels approaching 800. With its extreme moves, the bond market is telling one story, while the stock market recovery on Friday told another slightly less apocalyptic tale.

Resource and energy stocks were under pressure as crude prices continue to slide. Oil prices made a century of sorts last week, at below $47, oil prices have now fallen over $100 from their peak in July. The decline is all the more remarkable when you consider the fact that oil started the year under $100. Crude eventually closed the week at just above $40, though oil majors such as BP, Shell and Exxon Mobil managed to hold up relatively well. The divergence between oil prices and oil majors may possibly be a function of oil producers being able to extract good margins, as the price at the pumps hasn’t fallen to the same by the same severity as the price of crude.

This week’s stand out economic announcements include UK PPI on Monday, and manufacturing production on Tuesday. US pending home sales are released on Tuesday afternoon with trade balance and unemployment claims out on Thursday. With Christmas around the corner, US retail sales will be followed closely on Friday, as will the University of Michigan consumer sentiment numbers.

Financials were amongst the worst performing companies as Libor broke its 23 day decline. 3 month Libor increased to 2.15% and overnight Libor also pushed higher. The main catalyst was Paulson’s announcements of changes to the Troubled Asset Relief Program. As this originally was seen as getting to the heart of the matter in terms of offloading toxic assets, investors are confused as to what this means for future prospects for financial firms in the US. In the US, the insurance giant AIG had its earnings estimates cut, as did Wells Fargo. Much worse are the rumours that Fannie May may have to tap into US government cash to avoid liquidation. Previously unaffected stocks such as HSBC were also down hard after poor results, and there was speculation that it too may need to follow Santander’s lead in raising money through a rights issue. Until very recently HSBC and Santander were seen as being at arms length to the current crisis due to their relatively low exposure to the US housing market. However, with news of the UK property crash worsening and Asian markets faltering, HSBC is coming under increasing pressure.

More than anything market participants hate confusion or indecision, with the common reaction being “if in doubt, get out”. This is reflected in the performance of financial shares across the globe. Even when the wider market attempted a rally, financials were weighing on sentiment, like a ship trying to sail with its anchor still deployed.

Although last weeks UK unemployment data and sales projections from various companies fell below consensus, European markets didnt revisit the October lows and US markets managed to rally from beneath them . Despite the economic outlook arguably looking bleaker than it did just two weeks ago, markets havent capitulated. The optimistic interpretation of this scenario is that the bad news is starting to be priced in by the stock market. As markets are forward looking by at least 6 months, they could be discounting the slowdown that virtually everyone is predicting, and are looking for what happens after that.

The pessimistic interpretation of the current scenario is that markets are as over optimistic now as they were a couple of months ago. The default reaction to any impending disaster is in most cases denial then panic. The pessimist would argue that investors are still too optimistic about companys future growth prospects, and so further falls are likely. The reality is that markets are flipping from optimism to pessimism almost by the hour and remain entrenched in a choppy mess. After repeated failed rallies over the last few weeks, the bulls would be forgiven for giving up the ghost.

The coming week kicks off with some middle tier US industrial production figures and Treasury secretary speaking late on Monday evening. On Tuesday there is a raft of UK and US inflation numbers followed by Fed chairman Bernanke testifying as US markets open. Wednesday sees the release of the last MPC meeting minutes and with Gordon Brown calling for further rate cuts, these minutes will be poured over closely for hints of future decisions. Later that evening the FOMC release the minutes from their last meeting and although many argue they are done for now, Wall Street is still calling for more cuts.

There have been many comparisons between current market action and the great depression of the 1930s, and in many ways these comparisons are valid. The last time markets were as choppy as they are today was indeed the 1930s. The world is a very different place to how it was 70-80 years ago, but the current extremes were seeing point back to this period as being a strong likeness. According to Rob Hannah of Quantifiable Edges, the stock market only recovered from this decade long malaise, once it switched from chop mode to trending mode. If a long period of chop is the worst we experience over the next few months, even years, although frustrating, there may be worse things that could happen. Ironically, a smooth decline which bottoms out to form a smooth rally may be the real harbinger of a recovery. This may be a moot point as we are still far from seeing smooth rallies or smooth declines.

Markets were still extremely jittery as evidenced by Tuesdays wild ride on Volkswagen, which temporarily became the worlds largest company by market capitalization. It overtook ExxonMobil for a short while when it rose above 1,000 Euros in the morning. Just two days previously, it was trading at 200 Euros. Porsche increased their stake in the company to 75%, but the real reason for the huge spike was the squeeze on short traders. Volkswagen has the highest short interest of any stock on the German DAX index. Although shareholders in Volkswagen are rather happy right now, last weeks spike is more a symptom of the lack of liquidity in todays market place. The German DAX index massively outperformed other markets, with the Volkswagen spike having a disproportionate effect on Germanys benchmark index.

This week has a busy economic calendar, starting with UK and US manufacturing numbers on Monday. BOE Governor Kings speech in the afternoon may provide clues as to the likely size of Thursdays expected interest rate cut. Analysts are anticipating a cut from 4.5% down to 4.0%, but a cut of larger magnitude may not be out of the question. Wednesdays ADP Non farm employment change will provide clues as to the likely outcome for the weeks hottest trading ticket, Fridays Non farm payroll figures.

The rally last week helped ensure that October 2008 was spared the embarrassment of being one of the worst months on record, but we are far from being out of the woods yet. Although October could mark an intermediate term low point, it is highly unlikely that it will be plain sailing from here. What is more likely over the next 3-6 months is continued volatility, with many more days rising or falling by 5%. If, and it is a big if, we can get some follow on buying over the next week or so, we could continue to back and fill higher over the next few months.

Monday October 20th:

GE – 08:30 – PPI M/M.
UK – 08:30 – Prelim M4 Money Supply M/M.
UK – 08:30 – Public Sector Net Borrowing.
US – 14:00 – Fed Chairman Bernanke Testifies.
US – 14:00 – CB Leading Index m/m.
US – 16:45 – FOMC Member Kroszner Speaks.

Tuesday October 21st:

UK – Tentative – BOE Governor King Speaks
UK – 10:00 – CBI Industrial Order Expectations.
US – Tentative – FOMC Member Stern Speaks.

Wednesday October 22nd:

UK – 08:30 - MPC Meeting Minutes.
US – 14:35 - Crude Oil Inventories.

Thursday October 23rd:

FR – 06:45 - French Consumer Spending M/M.
EU – 08:00 - Current Account.
UK – 08:30 - Retail Sales M/M.
UK – 08:30 - BBA Mortgage Approvals.
EU – 09:00 - Industrial New Orders M/M.
UK – Tentative - MPC Member Gieve Speaks.
US – 14:00 - HPI M/M.
US – 14:35 - Natural Gas Storage.

Friday October 24th:

ALL – ALL- Opec.
GE – 06:00 - Import Prices.
FR – 07:00 - Flash Manufacturing PMI.
FR – 07:00 - Flash Services PMI.
GE – 07:30 - Flash Manufacturing PMI.
GE – 07:30 - Flash Services PMI.
EU – 08:00 - Flash Manufacturing PMI.
EU – 08:00 - Flash Services PMI.
UK – 08:30 - Prelim GDP Q/Q.
UK – 08:30 - Index of Services Q/Q.
US – 14:00 - Existing Home Sales.
US – 13:55 - Prelim UoM Inflation Expectations.