Volatile oil prices… Bush blames Democrats for fuel crisis… More gloom on Wall Street… Stocks take a beating…

Crude futures encountered a volatile week last week as traders analyzed the contrasting news from aboard. On one hand, the news that Saudi Arabia may be increasing oil production and that China is hiking gasoline and diesel fuel prices should dampen demand and move prices lower. On the other hand, Israel threatened Iran’s nuclear facilities and rebels reportedly attacked a Chevron Corp. (CVX) plant in Nigeria late last week (both should contribute to higher oil prices). For now, crude stands around the $135 per barrel level.

Despite his low popularity rating, President George Bush has yet to relinquish the limelight as he blamed the Democratic Congress for the record gas prices. Playing his own political game, President Bush proposed lifting the ban on drilling in certain environmentally friendly regions, knowing full well that such an idea will be met with great resistance. He also acknowledged that such measures would have little impact on the current state of the energy sector as new drilling would take years to implement and even longer to generate any real results.

Lehman Brothers Holdings Inc. (LEH) announced a startling $2.8 billion loss in the second quarter, its first since going public, though the company avoided (for now) becoming the next Bear Stearns Cos. Inc. (BSC) by raising $6 billion in new capital. Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) both reported declining earnings, though each bested The Street’s already dire expectations.

Rumors have Merrill Lynch & Co. Inc. (MER) and Citigroup Inc. (C) taking more write-downs, negating prior speculation that the worst of the credit crisis had ended. That speculation resurfaces on a fairly regular basis, and whenever it does, we’ve emphatically told Money Morning readers to ignore it. Our view was supported this week over in Europe when analysts at Royal Bank of Scotland Group PLC (RBS) said looming write-offs would cause a global stock-market crash by September.

In non-financial corporate news last week, FedEx Corp. (FDX) reported a quarterly loss and projected a pretty negative outlook for 2009 due to soaring fuel costs. After its snubbing by Yahoo! Inc. (YHOO), Microsoft Corp. (MSFT) denied any interest in other Internet acquisitions at this time. Continental Airlines Inc. (CAL) and UAL Corp. (UAUA) (United Airlines) are teaming up in a “non-merger” alliance to help create new revenue sources and cost efficiencies without the risks and red-tape of a full-fledged transaction.

In the “misery-loves-company” category, the global markets struggled mightily last week as the Shanghai Composite Index fell to a 16-month low and has declined about 50% on a year-to-date basis. Likewise, indexes in Tokyo, Bangkok, and Hong Kong have followed suit.

Here at home, the Dow Jones Industrial Index plunged below 12,000 for the first time in more than three months, as rising food and energy prices and ongoing negativity from financials continued to weigh on investors. Bonds, which had come under pressure lately over future Fed policy, were the recipients of a flight-to-quality mentality as some investors sought the safe haven of the Treasury markets. For the time being, however, it’s all about those skyrocketing food and energy prices.

But then again, don’t economists always downplay “volatile food-and-energy prices” as they tell us to focus on so-called “core” inflation?

Source: All Eyes Will be on the Fed as Investors Look for Signals on Both Inflation and Interest Rates