Sentiment deteriorated further during the past week as oil prices rebounded, more bad news in the financial sector surfaced, economic woes mounted and inflationary pressures intensified, compounding already-jittery investors' anxiety.

Status Quo's lyrics "Down down deeper and down" came to mind as global stock markets took a battering. The Dow Jones Industrial Index, for example, plunged by 3.8per cent over the week to below 12,000 – its lowest level since March. Commensurate with extreme bearishness, short interest on the New York Stock Exchange jumped to an all-time high during the week. At the centre of investors' angst was the perception that the credit crisis has not yet played itself out. These fears were supported by Goldman Sachs analysts who said last week they did not expect the credit crisis to peak before 2009, and that US banks might need to raise $65 billion of additional capital (on top of $159 billion raised so far) to cope with additional losses from the sub-prime fallout.

On a related note, Moody's downgraded the credit ratings of Ambac Financial (ABK) and MBIA (MBI), citing their limited ability to raise new capital and write new business. Banks were also in focus as analysts cut their price targets for, among others, Goldman Sachs (GS), Citigroup (C) and Wachovia (WB).

In one of the most bearish reports for a while, The Royal Bank of Scotland advised clients to brace themselves for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks. "A very nasty period is soon to be upon us – be prepared," said Bob Janjuah, the bank's credit strategist (who gained credibility after his warnings last year about an impending credit crisis).

Richard Russell, 83-year old author of the Dow Theory Letters, expressed concern about the stock market's negative breadth and said: "I did a double-take when I read Lowry's statistics … Buying Power Index at a multi-year low and Selling Pressure Index at a multi-year high. And the two Indices at about their widest (most bearish) spread in history or since the 1930s. What the devil could this mean? My guess can be summed up in one word – trouble."

But there is hope still, according to David Fuller (Fuller-money) who pointed out that Investors Intelligence's sentiment index (bottom section of the chart on the left) was extremely bearish. "There has never been a reading at current or lower levels that was not soon followed by a sharp rebound, including during the last bear market. This indicates to me that we are within a week or two of a bear squeeze, providing at least a tradable rally …"

Back to Richard Russell for the last word: "Lousy Fridays are often followed by rotten Mondays." To which I add: When in doubt (and there is a ton of doubt), better to err on the side of caution than to do something stupid.

I am flying to Slovenia and Switzerland, in my opinion the jewels of "old" and "new" Europe respectively, next weekend for a combination of work and leisure. Blog posts will unfortunately be rather slow during my 10-day absence, and specifically "Words from the Wise" will take a break next Sunday as I will be in midair when the review needs to be compiled.

Before highlighting some thought-provoking news items and quotes from market commentators, let's briefly review the financial markets' movements on the basis of economic statistics and a performance round-up.

Economy

"Global business sentiment appears to have turned a corner. It remains weak, but it has moved measurably higher since hitting bottom in late April," reported the Survey of Business Confidence of the World conducted by Moody's Economy.com . "Confidence remains weakest in the US where it suggests the economy is still contracting, and it is strongest in Asia where it is consistent with an economy growing near its potential."

Economic reports in the US were largely overlooked last week as market participants focused on corporate news, although there were several notable releases.

• The NAHB Housing Market Index fell by 1 point to 18, bringing it back to the record low reached in December and before that not seen since 1985.

• After plummeting since the beginning of this year, consumer confidence is showing tentative signs of stabilising, according to the ABC News/Washington Post Consumer Comfort Index.

• Industrial Production fell by 0.2per cent in May, following an outsized 0.7per cent decline in April. Overall, the report is consistent with continued modest declines in manufacturing.

• The Producer Price Index for finished goods rose by a large 1.4per cent in June as expected, following a 0.2per cent increase in April. Inflation was once again led by large price increases of food and energy products.