Market players face stormy weather

Financial markets gave investors a rough ride in the first quarter as rising oil prices, housing sector weakness and fears of default in the sub-prime mortgage industry erased early gains realized at the start of the year (Chart 1) . These conditions should continue to weigh on market sentiment as we enter the second quarter earnings season.

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The good news is that the Federal Reserve's neutral policy could be coming to an end and relief may be sight if the economy continues to slowdown. While the bond market's rise in rates over the past few sessions does not reflect this possibility, the recent performance in the Utility sector could be forecasting future market sentiment and a possible shift in monetary policy. The upcoming earnings period should give a better picture of where corporate profits will be for the second half of the year.

The bad news is that geo-political tensions are sending oil prices on a rocket-ride higher and unlike last year, the market will probably not absorb this pressure as easily as before. Retailers have been issuing warnings in their guidance, which means the consumer may not be the support which markets relied on in the past couple of years. Whispers of "irrational exuberence" in the Asian markets, China in particular, will most likely be the catalyst to bring the markets down, extending the current correction. This will however be healthy for the markets and will open up some good buying opportunities moving forward.

For now, Market players should be cautious for now and hedge their bets for the next few weeks.