The economy remains caught up in recession, and markets are still trying to figure out the cross currents. Let’s take a look at action in the financial markets last week, and see what might be store for us in this historic inaugural week.

The fourth quarter of 2008 ended deep in recession, and indications for the first quarter 2009 are for more of the same. Fundamentals are likely to be negative for a number of months, as housing may actually get worse, consumers retrench, and state and local government spending cuts add to the economic woes.For the Treasury market, there are serious cross currents.The economy is weak and inflation is low.But the federal deficit is ballooning. It is just a matter of time before the deficit problems outweigh the recession. Meanwhile, stocks are still peering into the future, trying to determine when the economic recovery will begin. Last week, the Dow Jones Industrial average was down 3.7 percent, the S&P 500, down 4.5 percent, and the Nasdaq, down 2.7 percent. Year-to-date, major indexes are down as follows: the Dow, down 5.6 percent, the S&P 500, down 5.9 percent, and the Nasdaq, down 3.0 percent.

Stock Market

The stock market was pushed down last week by economic news pointing to a worsening recession, negative earnings reports for the fourth quarter, and renewed concerns that the worst is not over for banks and other financial firms.December retail sales were terrible, although not as bad as initially believed after price effects were sorted out. The other major economic indicator was industrial production – which pointed to a worsening manufacturing sector. Also, the Federal Reserve’s latest “Beige Book” report on regional economic activity was even gloomier than the December Beige Book.

Financial firms stood out this past week for huge fourth quarter losses, including $1.79 billion in red ink for Bank of America and $8.3 billion for Citigroup. Merrill Lynch (although being acquired by Bank of America) had much sharper-than-expected losses of over $15 billion. It was not just the financials with earnings problems, either.

Turning to stock index futures, the March S&P 500 index closed higher on Friday, January 16, 2009, due to short covering as it consolidated some of last week’s decline. Technical momentum indicators, the Stochastics and the Relative Strength Index (RSI), are oversold but remain neutral to bearish, signaling that sideways to lower prices are possible near-term. If March S&P extends last week’s decline, I view gap support at 802 as the next downside target. Closes above the 10-day moving average at 881 could temper the near-term bearish outlook. First resistance is the 10-day moving average at 881. Second resistance is the reaction high at 915. First support is last Thursday’s low at 813. Second support is the reaction low at 802.

Treasury Market

The economy and the Fed bumped Treasury bond yields down this past week, while rates on Treasury bills and notes were mixed but little changed.News of a deepening recession and lower inflation helped longer rates ease.Weak economic data included retail sales, industrial production, the EmpireState index, Philly Fed index, and a gloomy Beige Book report.The sharp declines in headline inflation for the Consumer Price Index (CPI), Producer Price Index (PPI), and import price index also were favorable to lowering bond yields. Long rates eased despite ongoing concern over heavy Treasury demand for money to fund current bailout programs as well as talked about fiscal stimulus expansion – leading to projected federal deficits topping $1 trillion for possibly several years.

A new development came from the Fed following through with earlier hints at getting involved with markets for longer maturities. The Fed – as part of its “credit easing” – bought $23.4 billion of Fannie Mae, Freddie Mac and Ginnie Mae mortgage bonds.Flight-to-safety also was a factor this past week.

Energy Market

Crude oil prices continued their downward spiral last week, dropping close to $4 per barrel.Oil is being hit hard by a plummet in demand from global recession. Prices swooned on negative economic news from the U.S. and about China – two heavy oil consumers. Late last week the International Energy Agency (IEA) released its latest forecast for world oil demand, and lowered its estimate for 2009 demand by 940,000 barrels per day to 85.3 million. Notably, the IEA stated that Chinese crude oil demand would grow at its slowest rate in eight years as that economy’s growth cools somewhat. Also last week, OPEC cut its projection for world oil demand estimate for 2009 by 20,000 barrels to 85.66 million barrels a day.Finally, U.S. distillate inventories were up significantly more than expected.

Overall import prices were extremely weak in December, but downward pressure came mainly from falling prices for crude oil and other commodities. Import prices fell 4.2 percent in December after plunging 7.0 percent the month before. In the latest month, petroleum import prices fell a whopping 21.4 percent. But excluding petroleum, import prices fell a more moderate 1.1 percent after a 1.8 percent decline in November.

FOREX Market

As expected, the European Central Bank (ECB) lowered its key interest rate by 50 basis points to 2 percent. It was last at this level in November 2005. The ECB began lowering rates in October 2008 when it participated in coordinated rate cuts with other major central banks at the height of the financial crisis. Since October, the ECB has lowered rates by 225 basis points. At the December meeting, ECB president Jean Claude Trichet had signaled his wariness about taking interest rates too low, arguing that the effects of cuts already announced and of government rescue plans should be allowed to work through. But the slide in economic data since then has suggested that the recession will be deep and protracted, and appears to have forced a change of mind.

The U.S. dollar continues to be the safe haven of choice when equities are as volatile as they have been. The euro currency has been declining primarily because the financial markets think the ECB is behind the curve in cutting interest rates given the floundering economy. Eurozone rates remain among the highest among the world’s major industrialized countries; the ECB rate of 2 percent compares with 1.5 percent in the U.K. and a range of zero to 0.25 percent in the U.S. The euro also has been affected by the wider sovereign bond spreads for countries such as Spain, Greece, Portugal and Ireland when compared with Germany.

Financial Fundamental Reports:Jan 20 – Jan 23, 2009








Jan 22


Building Permits




Jan 22


Housing Starts




Jan 22


Initial Claims




Jan 22


Crude Inventories




Good luck and good trading!

Jeff Friedman is a Senior Market Strategist with Lind Plus. He can be reached at 866-231-7811 or via email at Join Jeff for his monthly webinar, Friedman’s Futures Forecast, by visiting Lind-Waldock’s events page.

Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.

You can hear market commentary from Lind-Waldock market strategists through our weekly Lind Plus Markets on the Move webinars, as well as online seminars on other topics of interest to traders. These interactive, live webinars are free to attend. Go to to sign up. Lind-Waldock also offers other educational resources to help your learn more about futures trading, including free simulated trading. Visit

Futures trading involves substantial risk of loss and is not suitable for all investors. 2009 MF Global Ltd. All Rights Reserved. Futures Brokers, Commodity Brokers and Online Futures Trading. 141 West Jackson Boulevard, Suite 1400-A, Chicago, IL60604.