Equity markets around the world moved sharply lower again last week. The optimism of the new year was quickly replaced by the fear, if not the reality, of the next round of corporate reporting for December 2008 quarter results and associated announcements. It was September 2008 quarter reporting that coincided with markets reaching their lowest levels seen so far in this bear market.In Australia, we entered the confession period, when companies announce profit warnings ahead of releasing their results next month. This did not help the performance of the local market.The net result of was that the S&P 500 and the S&P/ASX 200 finished the week at 850 and 3551 points, respectively, just off their lows for the week and the year to date of 843 and 3530 points. This leaves the indices down by 5.8 per cent and 4.6 per cent for the year to date but still up by 13 per cent and 5.9 per cent from their November 20 lows.It should come as no surprise that December 2008 quarter results are poor: this was always going to be the case in a quarter that saw the wholesale recasting of the global financial system and the world's major economies officially declared in recession. However, the question remains, have we seen the worst?The equity markets for the moment are saying no, and there are many economists and financial market commentators of the same view, but it was the credit markets that took us into this mess and it must be the return of some normality to credit markets that will take us out. Equity markets will continue to lag.The first step is the return of liquidity to the global banking system. Compared with conditions in October, liquidity has improved. Three-month US dollar Libor rates peaked at 4.82 per cent on October 10, when the cash rate in the US was 1.5 per cent and three-month treasury notes were yielding just 0.23 per cent. It was then that the gap with the latter, known as the TED spread, peaked at 459 basis points.The cash rate in the US is now between zero and 0.25 per cent and during the week three-month treasuries yielding 0.12 per cent and a three-month Libor rate of 1.09 per cent allowed the TED spread to fall to 97 bps - its lowest level since the peak.Liquidity conditions in Australia have followed the same trend but not as consistently. One of the key indicators of systemic liquidity is the spread between the three-month bank bill rate and the overnight index swap rate. This peaked at 144 bps on October 7. The spread finished last week at 54 bps, but was as low as 33 bps in mid November.The official cash rate has fallen from 7 per cent at the start of October to 4.25 per cent now, but more telling is what has happened to exchange settlement account balances held by banks with the Reserve Bank. The amount held in ESAs peaked at A$11.2 billion on