While the media's focus continues to be on the mortgage and credit crisis, oil has quietly been making its way back up to $100 per barrel. Oil has already passed its inflation adjusted peak of $80. If oil continues to rise, it will be more expensive that at any other time in history in real terms.

The direct effects of this will be felt by the already badly beaten consumers who have for years supported the US and UK economy at the expense of their savings, then house equity and now credit cards. There is a huge concern that this latest rise might be the final straw for consumers in a slowing economy.

Friday's rout was almost a perfect storm. US Payroll numbers were below expectations and unemployment rose from 4.7% to 5%. Recently bad news has sometimes been good news for the stock market because of the possibility that interest rate cuts might follow. Unfortunately, Friday’s bad news really was bad news. It has increased the likelihood of further cuts to US interest rates, but the Fed may be limited in how far they can go due to the inflationary effects of a high oil price. With inflating commodity prices and a potentially deflating economy, the sellers were out in force.

The first hint of this was the US Institute for Supply Management's (ISM) report that stated that the manufacturing index fell to 47.7 percent for December from 50.8 percent in November. This sparked concerns that the economy could be slowing at a quicker pace than some investors had estimated. A reading below 50 can signal economic contraction, whereas readings over 50 can indicate expansion. Last week the US Dollar fell heavily against the Yen and ‘safe heaven’ currencies such as the Swiss Franc. It was recently reported that the Dollar’s % share of foreign currency reserves has dropped at the expense of the Euro, though selling of the Dollar/ Euro exchange rate was relatively moderate on Friday compared to the falls in US equities.

Aside from US existing home sales on Monday, it is a relatively quiet start to next week, but momentum quickly builds in the final two days with both the UK and European central banks releasing their interest rate decisions. The ECB is widely expected to announce a no change verdict. The Bank of England is also expected to keep rates the same, but this is less certain and a quarter point reduction is still possible.

Friday saw some of the heaviest selling since the credit crisis broke with the S&P 500 now down 3.86% for 2008 with just 3 trading says gone. The Nasdaq Composite has been the worst hit so far and is down 5.6% in the 3 trading days of the new year. The Nasdaq 100 and broader Composite are the only major indices aside from the Nikkei to be trading below their November lows. The Semiconductor sector, full of stocks like Intel appears to be weighing heavily on the high tech markets.

According to research from Bespoke Investments and Sentimentrader.com; last week was the 2nd worst three day start to the year ever on the S&P 500, the fourth worst on the Dow and worse ever for the Nasdaq. However, the big question of course is what this means for the future. According to the aforementioned research, a terrible start for the year may not mean that 2008 is automatically a write off. When the S&P 500 has stumbled out of the gate in the past, it gained an average of 2% over the balance of the month and 10% the rest of the year.

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