Economic Summary for the week ended 21st Oct 2014

A week is a long time in politics, and this last week has felt like a long time in financial markets: the first half of the week with plunges in equity markets worldwide, the second part of the week with a sharp recovery, both in equities credit and high yield. There were almost unprecedented swings on a daily basis – sometimes on an intra-day basis – in the trading of US 10-year Treasury bonds. It was a week that led people to ask a lot of questions about investment policy, the world economy, and the enormous spike in volatility. Before addressing those, let’s briefly remind ourselves that for a long time volatility has been extremely low. Until recently, the volatility of commodities, of bonds, of currencies and of equities has been, by historical standards, exceptionally low. Uncertainty presents itself in many ways. It’s rather like holding a beach ball under the water – when you let the beach ball go, it bounces up further. That’s what I think we’ve seen; that’s what we continue to see. The proximate cause has been a reconsideration of the race of economic growth globally. Interestingly, although much of the commentary has been on Europe, the sector volatility in the equities space and the bond market volatility has been far greater in the US, probably because it was a given part of everybody’s investment thesis that US growth is recovering strongly and it wouldn’t be long before the Federal Reserve (Fed) would be starting to raise rates.

The turning point came this week when a number of Fed governors said that they would not rule out further stimulus in the future, or that they are arguing the case for an interest-rate rise to be pushed further out into the future. The markets rallied around that. That’s a straightforward signal that global markets still need either price stimulus or quantity stimulus, or that they’re going to reset their valuation base very rapidly. We think that the valuation base has already been reset, because even if rates are going to rise, they’re going to rise quite gently. That was true before the last two weeks, and it’s truer now. The higher-yielding end, and the slightly riskier end, of the fixed-income complex really has got some considerable value in it, and it’s worth looking closely at exposures there.

By contrast, long-duration government bonds have rallied very strongly because they’ve been the only diversifier around, and are almost certainly overvalued. For equities, the case still remains that they are the asset with the real rate of return whereby corporate earnings, as we’re seeing in the current earnings season, and cash flows are rising, and the ability to reward shareholders to increase dividends and corporate activity still remains very much in place. At the centre of this somewhat disastrous last couple of weeks has been economics. This week, we will get a number of economic releases which will be closely scrutinised, particularly on Thursday, when Japan, China, France, Germany, the Eurozone, and the US release their purchasing managers’ index figures for October. The market will examine those numbers very closely. It will also examine China’s figures on Tuesday for investment retail sales and third-quarter GDP. All the evidence suggests that the government in China is working overtime to ease policy on housing and the availability of credit at this stage, partly to meet the 7.5% GDP target the central government has set, and partly because they are probably concerned that things are slowly down too fast. Over the next few months, we expect a cyclical, but not a secular, recovery in the low levels of Chinese output led by upgraded activity in the housing market. We’ve also got a series of corporate earnings this week: from the pharmaceuticals sector, Glaxo, in Europe; from the banking sector, Credit Suisse, in Europe; and consumer plays such as Daimler and Amazon and, finally, Caterpillar. The latter will paint a picture of very considerable traction in the demand for global construction equipment. The reason for focusing on that is that it leads one back to the epicentre of the change in views about the economic outlook, which has been filled with disappointing numbers from Germany. We believe that the European economic outlook is very flat, but that there will be some cyclical improvement in numbers over the next six months. Fiscal easing and a little bit of policy change will help things along. We believe that the overselling of cyclical stocks in the stock market has provided a deep valuation opportunity.

Fortune could favour the brave

In summary, volatility has come back; it’s probably risen too far. Economics are low and flat, but in some areas they are going to improve relative to quite low expectations. Positioning has been flushed out quite a bit. There is some good value at the longer end of high-yield and emerging-market debt as a consequence of recent events, and for those who want to be brave, deeply cyclical shares have fallen so considerably in value and might just be positioned for a bounce-back.

Economic Summary for the week ended 16th Oct 2014

The past week has been a very difficult one for many financial markets as the severity of the risk-off phase – which began a few weeks ago – intensified further. Global equities are now more than 5% down from their previous peak. The year-to-date gains in global equities have now been eliminated: of the main indices, only US equities are still in positive territory. There has also been a major correction in commodity prices and, while the weakness this past week has been across the board, the $20 decline in the oil price over the past few months remains the most noteworthy move. Credit spreads have widened in recent days, but the selling pressure on investment-grade spreads has been relatively muted. Almost inevitably, high-quality government bond yields in this environment have declined further, but they have edged lower rather than collapsed. They still remain within recent ranges in the US and the UK, but the 10-year German government bond yield has hit new lows. So what’s driving these moves? Are we looking at a technical correction within a bull market, or a more fundamental change in the global financial background? And if this is a more fundamental move, exactly what fundamentals are we talking about? It’s important to emphasise that some of this correction does appear to be technical. The consensus in the global financial community has been more risk-on than risk-off, hence the chance that positions would get closed out if markets move in the opposite direction. This factor does appear to have been at work in recent weeks, with volumes relatively high. On a technical basis, many markets do now appear to be rather oversold. However, if we focus more on the fundamental factors, it appears that you’re potentially spoiled for choice. The dominant fundamental factor at the moment seems to be – not for the first time this cycle – about global growth, or rather, the lack of it. It’s pretty clear that the global economy had been subdued at the first half of the year, but there’s been a fairly widespread expectation of some lift-off occurring in the second half and into 2015. However, this expectation has been challenged, to date, rather than confirmed by recent data. At the global level, industrial production just seems to have stalled over the summer.

Digging deeper, there’s been some acceleration in US growth, but not really a powerful lift-off. Elsewhere, there have been clear losses in growth momentum in China and the Eurozone. The rebound in economic activity in Japan, after the inevitable slowdown following the tax rise earlier in the year, has been muted. Digging deeper still, within the Eurozone, it’s Germany – rather than the more troubled peripheral countries – that is at the core of the slowdown. German growth had been negative in the second quarter, and has been soft again recently, raising concerns about a potential shift back into recession. It’s worth emphasising that the markets are reacting to what is a fairly small incremental change in the global growth backdrop. There is little evidence that there is a marked slowdown in economic activity underway. There is a case to be made that the weakness in commodity prices is telling a different story, but this week, this appears to be as much supply-driven as demand-driven. We have seen many fluctuations in global growth before, and while we know that these are important, it is also potentially dangerous to extrapolate them.

Eyes on US earnings

It is possible to make some broad generalisations about recent events in the global economy. First, underlying demand conditions have remained stronger than output growth. Weakness in industrial output does seem to have been partly the result of inventory reductions, which are more likely to prove a temporary rather than permanent influence. Second, this inventory challenge has been concentrated in the global auto industry, where output looks likely to rebound quickly and possibly strongly. And third, some corrective mechanisms are potentially coming into play. In particular, much lower food and energy prices should increase consumer spending power. There is also the possibility that slower growth would lead the Federal Reserve and the Bank of England to delay rate rises, which are a particular issue hanging over markets. So our current conclusion is that the global economy is not in free-fall, and there is scope for a rebound as we go into 2015. However, in environments like the one we’re in, the market’s sensitivity to macro data is even greater than usual, so the upcoming earnings season in the US will be particularly important in providing a greater outlook on what really is going on in the global economy

Economic Summary for the week ended 9th Oct 2014

Market movements

It was an interesting week in markets, with new themes emerging, old themes persisting, and some resumptions of themes that we saw earlier in the year. It’s fair to say that one new theme has been the increase in volatility across equity markets (most of which were down 1% to 2% on the week). The driver of this has been fear about growth and ongoing concerns about deflation. To that end, it’s fair to say that on both sides of the Atlantic, investors’ expectations for inflation continue to fall. For example, let’s look at bond markets and what they’re pricing in for inflation over the next 10 years: in the US, that level of expectation has fallen below 2%, when historically it’s been closer to 2.5%. In the Eurozone, that number is now below 1.5%, where typically it has been closer to 2%. In fact, on a data front, we saw Eurozone-wide inflation (CPI) drop to 0.3%, getting very close to that zero-deflationary level that people have begun to become fixated on. Perhaps another way of thinking about inflation expectations is to look at the price of gold. Gold last week fell below US $1,200 per ounce: with the exception of the start of this year, you have to go back to August 2010 to find a point when gold traded less than that number. This is also an indication of the broader weakness that we’re seeing in commodities, which is adding to this expectation of inflation being lower that we had previously assumed.

On the growth side of the equation, it’s fair to say that Eurozone growth remains weak, particularly in northern Europe. On Monday, German factory orders were released for September, which had almost 6% on the month and is now down 1.3% year-on-year. The picture is better in the US, where we saw decent employment data on Friday, with the unemployment rate falling to 5.9%. But even there, people are concerned. For example, we saw the forward-looking indicator of manufacturing data come out weaker than expected, although very much in positive territory. In terms of new themes for the market, this idea of equity volatility is largely driven by concerns about growth and deflation. As mentioned at the start, old themes – such as the strength of the US dollar – continued to dominate the week. In fact, the dollar continues to hit new highs for this cycle across many of the major currencies. For example, the currency is getting very close to 1.10 versus the yen, dropping to about 1.25 versus the euro, and with sterling, falling below the 1.60 level. It’s a continuation of monetary policy driving this theme, specifically expectations for the Federal Reserve raising interest rates early next year and the European Central Bank (ECB) and the Bank of Japan continuing to pump liquidity into the system.

Last week, we saw the ECB give further details of its asset-backed securities purchase, which some are alluding to as being very similar to quantitative easing. One question around this is that sterling has been particularly weak versus the dollar, yet expectations in the UK are still tilted towards a rate rise at the start of next year – which is puzzling. But you have to look at this through the lens of the Eurozone, where sterling has been trading very closely with the euro. And in fact, some of the worries are focused around how the economy will be impacted by this slowdown we’re seeing.

Where do we go from here?

The obvious question raised by the dollar strength is “where do we go from here?” The strength of the dollar last week suggests that there are still many people tempted to jump onto this trend; but we have moved a long way and I would expect that, while that trend of dollar strength will continue, price action isn’t likely to be much more two-way going forward.

The third of last week’s themes was the resumption of a topic that dominated markets earlier in the year. Emerging markets started 2014 very weak – they outperformed over the summer, but there are a couple of things now driving that re-emergence of weakness. The first relates to the broader volatility in equity markets and concern around growth, but also the dollar strength. Historically, it’s worth noting that, in periods of dollar strength, emerging markets have generally underperformed or been weak. I would caution against reading too much into this: if the dollar is strong due to some positive momentum from an economic perspective, that could be an environment that is broadly more supportive for emerging markets, particularly those in Asia. We continue to see some idiosyncratic issues at play in emerging markets.

Russian assets were very weak last week. Democratic demonstrations in Hong Kong are putting pressure on all things Chinese. From a perspective of growth, we remain very confident about the outlook for the US; any slowdown in data should be examined in context with what is actually a robust growth picture for the country. There are some challenges around the Eurozone, particularly for some of the larger economies: some of those are starting to weaken quite markedly. Linked to this is an important point about deflation. Central banks will do all they can to avoid deflation, but the market is getting more and more concerned about it.

The economic background of being broadly positive should continue to be supportive for equity markets, but I think the question marks that are coming through in terms of that pattern of growth and the uncertainly around rates means that we can expect higher volatility as we head toward the end of the year. The message is one of being reasonably constructive about equities, but we shouldn’t expect the very low levels of volatility and risk that we’ve seen over the summer to continue into the end of the year – it’s going to be a bumpier ride.

Economic Summary for the week ended 20th Sep 2014

Latest market views from the BlackRock Investment Institute

This week is set to be a key one for risk assets as we head towards the final quarter of the year. On the geopolitical side, Thursday’s Scottish referendum and the Ukraine situation dominate the headlines.

Less tweeted about, but equally, if not more, important, is the spectre of real central-bank divergence as we head into Wednesday’s Federal Open Markets Committee (FOMC) meeting in the US. Over the past week, these looming developments have reversed the recent positive momentum in markets. For equities, it was a down week. The S&P 500 fell back below 2000, while Europe’s recent European Central Bank (ECB) resurgence came to a grinding halt. Spain was hardest hit, both in stocks and bonds as the potential repercussions of a ‘Yes’ vote in Scotland raised claims for the unofficial Catalonian referendum to be granted more prominence by Madrid. Italy was also weak, partly on profit-taking from the ECB-fuelled peripheral asset rally, which reminded us that Prime Minister Renzi faces a testing time in the coming months for his reform drive.

Elsewhere, this week in France will see a confidence vote and speech from President Hollande on reform. However, for once the UK is centre stage, with markets finally waking up to the closeness of the Scottish referendum. Last Sunday’s poll giving the Yes campaign the lead for the first time sent sterling from 1.63 towards 1.6 against the dollar. By the end of the week, however, it was back above 1.62. Various polls in recent days show the result as too close to call. The only certainty is that the referendum will lead to changes in the UK, regardless of whether the result is a yes or a no. So currency volatility in sterling is likely to continue.

All eyes on central banks

Away from the UK, this is a key week for the US Federal Reserve (Fed). Recent economic data has shown steady improvement, but only limited signs that the drop in unemployment is feeding through to rising wages – the main focus for the Fed. This has allowed bond markets to remain largely sanguine. Two-year yields have risen over the summer and the dollar has embarked on a broad-based strengthening, but the longer-dated end of the yield curve has remained very range bound, until now.

The past week has seen the first signs that the extremely low bond-yield environment of the summer may now be shifting, with the 10-year bond moving up 15 basis points to 2.6%. On an absolute basis, 2.6% is still very low, but remember we started the year at 3%. The backup in yields has been quick and comes at a time when US equities are at record highs. The front end of the US yield curve has moved to price in earlier rate hikes, with June now favoured. In our mid-year outlook, we saw the Fed as the main threat to risk assets in the autumn. So far, that has been overshadowed by the ECB. But now it’s the Fed’s turn again, with this month’s FOMC meeting. Analysts’ eyes will be on whether the phrase ‘considerable period’ is again used. The 2017 ‘dots’ (the Fed’s own projections of where interest rates may be) will also be released, possibly giving more insight as to the likely terminal rate.

Back in Europe, this week sees the first TLTRO allotment – the targeted long-term repo operation announced by the ECB back in May. A total of up to €400 billion will be allotted to banks, with conditions to encourage lending to ensure the money enters the real economy. The original LTROs were successful at stopping the liquidity crunch that was enveloping the European banking system two years ago, but did little to spark lending activity, as most of the funds went into the ‘carry trade’ of buying peripheral government bonds. The TLTRO takeup is likely to be large, but questions remain about what banks will actually do with the money. Meanwhile, German bund yields are back above 1%, pulled up by the move in Treasuries and some realisation that sovereign quantitative easing is not a done deal.

China and Brazil reverse their rallies; Japan a bright spot

Further afield, emerging-market (EM) equities’ recent performance reversed, led down by China and Brazil.

For China, concerns over the government’s GDP targets are back, with recent economic data showing industrial weakness. China’s equities rally has gone long way, but needs a short-term catalyst to keep it going, given the economic reality of rebalancing. This could raise pressure for more government or central- bank easing support. The convergence of A-shares and H-shares has been helped by the ‘Shanghai Connect’ test trades, whereby offshore investors can now buy domestic equities. Similarly, the Bovespa has given back some of its exponential rally – a rally driven purely by hopes that political opposition can create another ‘Modi moment’. This has been enough for the equity market to defy the reality of a rapidly deteriorating economy on its way to stagflation with zero growth, but the risks are clear. For broader EMs, this compounds the risk of a more hawkish Fed that has seen EM currencies weaken versus the dollar. It is important to watch the ‘fragile five’ to see if the currency sell-off accelerates. Within Asia, our preferred area, Korea, has struggled recently, in part because of the weaker yen.

Finally, one bright spot in global equities is Japan. The Topix outperformed other major indices by rising over 1% last week. Having been range-bound all year, the dollar/yen has moved quietly, by 5 points to 107, and the Topix has pushed over the key threshold of 1300. With a weak yen, and news due about government pensions, Japan looks set to continue its stealth outperformance as markets’ attention stays firmly fixed on developments in Edinburgh and Washington.

Economic Summary for the week ended 11th Sep 2014

Last week was eventful, both in terms of policy and economic data. Equities were typically up between 0.5 and 1%. In the US, the S&P closed above 2000 for the first time and managed to sustain that level throughout the week. European equities rose by 2-3%, helped by the actions of the European Central Bank (ECB).

In Asian markets, both Japan and China were strong, boosted by confidence that China was doing reasonably well from a policy and growth perspective. The main laggard of the week was the UK, on evidence that the Yes vote in the Scottish independence poll was gaining ground. The biggest impact of this was on sterling, which saw considerable weakness, particularly against the dollar.

On the fixed- income side, both government and corporate bond yields drifted higher, largely on profit-taking but also on concerns that the US Federal Reserve’s view is becoming increasingly hawkish, making an early rise in interest rates more likely. The other main theme across markets was the stronger dollar, most in evidence against sterling, but also versus the euro, the yen and emerging-market currencies.

Quantitative easing – by another name

The key event of the week was the meeting of the European Central Bank (ECB). There had been much speculation that we would see the ECB establish a quantitative easing (QE) programme, as economic data over the past few months had shown sustained weakness in the core heartlands of Germany and France, and inflation was slipping below the 1% level.

The ECB did take action by cutting interest rates, but more meaningful was the ECB’s announcement that it would purchase asset-backed securities – this was dubbed “private QE” by the market. While there was some disappointment that the purchase of government bonds hadn’t been announced, it is quite possible that we’ll see this further down the track. Overall, this action was taken positively, and is obviously supportive of European banking because it helps free up the bank- lending channel. It is also positive for European equities, where we believe markets are among the cheapest on a global basis. The weak euro also helps corporate earnings.

Geopolitical crises dominate politics

On the politics front, last week’s focus was the Nato meeting in Wales. The focus was twofold: the approach to dealing with Russia and Ukraine, and a more coherent plan for the crisis in the Middle East. On the first point, despite the announcement of a brief ceasefire, we expect to see ongoing friction on the Russia/Ukraine border. This isn’t currently creating a huge amount of volatility but, given Europe’s dependence on Russian natural gas, especially as we approach the winter months, energy supply could cause problems. In the Middle East, pressure is building on western governments, particularly the US, to articulate a more coherent plan of action. The challenge is that this would require working more closely with the Assad regime in Syria, and negotiations with Assad could involve Russia. So in some ways, the two crises are linked, which gives a sense of how difficult the situation is from a political - negotiation perspective. While events in the Middle East have also had little impact on markets yet, with crude-oil reserves still high and the oil price weak, this could turn around pretty quickly, especially as the winter months approach and demand increases for heating supplies.

The implications of Scottish independence

The biggest focus in terms of market volatility here in the UK is the Scottish independence vote. The referendum takes place next week – on the 17th, with the results available two days later on the 19th. (I would draw your attention to a 10-page document our BlackRock Investment Institute produced in March, which runs through the implications of a Yes vote.) The key focus is the currency, where Chancellor George Osborne has made it very clear that he would not be willing to let Scotland use sterling on a longer-term basis. It’s worth pointing out that nothing would happen immediately following a Yes vote, because the first date at which independence could take place would be March 2016. But it seems likely that a Yes vote would create a great deal of volatility and uncertainty, particularly in terms of currency, and exactly how much of the gilt market Scotland will own.

A Yes vote would also have implications for a number of large companies that are currently headquartered in Scotland, as they would need to decide where to base themselves.

Policy highlights in the coming week

In the UK, house-price data, retail sales and industrial production figures will be published. Given the focus on the strength of the UK, and the potential for interest-rate rises, these will all be considered important pieces of the economic jigsaw puzzle. So we may see some volatility based on these releases. In the US, official releases include retail-sales data, and in the eurozone, inflation data, which has so far been a key influencer of ECB policy. Last but not least, it’s clear that the geopolitical issues described above will not go away any time soon and will continue to generate news headlines and cause volatility. But at this stage, markets are not paying a huge amount of attention to events in Ukraine and the Middle East.

Economic Summary for the week ended 9th Sep 2014

Market movements
August was an excellent month for investors in both bonds and equities. We saw government bonds in Europe rise sharply with the best monthly performance since the beginning of 2012. This also helped US Treasuries produce strong returns. In Europe, returns were variously 1.9–2.0% for the month as a whole. US Treasuries were up 1.2% and gilts rose 3.5%. This hauled credit up with it.
Of particular note was the recovery in US high yield, which posted a positive return of 1.8% for the month after outflows in July. For equities generally, markets were led by the S&P 500 index, which breached 2000 for the first time.
This represented a 4% rise, with financials outperforming. European stockmarkets were variously up between 0.5–2%. The UK market was up 2.1%. In emerging markets, Brazil was the star performer, up nearly 10% as people scented a political change coming. Indian and Chinese assets also rose. Only commodities were weak: copper was down 3%; sugar fell 5%; corn was flat after a weak July; and Brent crude oil was down 3.1%. The most important event was in currencies – the dollar strengthened, particularly against the euro, which declined nearly 2% against the US currency.
Quantitative easing for Europe?
Policy (or expectation of policy) linked all these developments together, as has been the case for the last two to three years. In August, we heard the admission by European Central Bank (ECB) Governor Mario Draghi – speaking at the Jackson Hole retreat – that the ECB was beginning to be concerned about the decline in European inflation expectations, which indicated a move towards some form of quantitative easing (QE). This was key to the stronger performance of European bonds, with 10-year German bond yields dropping by 27 basis points in August. French yields dropped by 28 basis points, from very low levels. People now hope the ECB will move towards implementing sovereign QE. However, real policy action remains some way off.
The first step along the way will be approval - possibly as early as Thursday of this week - of the beginnings of a programme to purchase asset-backed securities. This is a relatively small market in Europe, some 500 billion euro, so the injection that the ECB could make in terms of existing stock would be stretched over a period of time. The expectation is that the ECB would buy new asset-backed securities, and help companies reduce their cost of funding as a consequence.
Sovereign QE is some way off and we saw, as expected, a rather cutting response from Germany’s finance minister Schaeuble, who suggested monetary policy had reached its fullest extent in Europe. This is consistent with everything we’ve seen in the dance of ECB policymaking over the last two or three years: an initial proposition from Mr Draghi, followed by a period in which the hawks object, followed by a re- examination of still-softening data and a grudging acceptance. Nevertheless, I think we’re several months away at least – it may be the middle of next year – from full-on quantitative easing in the sense of buying sovereign debt. However, the markets anticipate, and that’s what we saw in relatively thin volumes in August.
Policy highlights in the coming week
In the coming week, the ECB has its meeting on Thursday this week. On Friday, payroll figures are announced in the US. Regarding the ECB, the market will be focused on whether or not the bank actually announces the beginning of QE, and Draghi’s remarks at the following press conference.
In the US, there is some expectation, given the softening trends in retail data and personal consumption, that the payrolls number will be sufficiently low – around 200,000 or below – to mean that the Federal Reserve’s meeting on 16 and 17 September will produce no significant change in the outlook.
One other central-bank policy point to note in August was the Bank of England’s (BoE) Monetary Policy Committee voting by seven to two in favour of retaining interest rates as they are. This was the first time under Governor Carney that the vote was not unanimous.
We believe that the BoE is slowly moving towards some form of tightening, but that this is several months away from materialising. Monetary policy is still wholly supportive and will remain so. This means holding cash is a rather painful experience, with bonds likely to continue to perform strongly, and equities even more so, particularly if good funding markets continue to allow buybacks of shares and cash-funded M&A activity. The only major fly in the ointment is geopolitics, especially developments in Ukraine. Here, the line in the sand that would lead to risk expanding well beyond Russian equities would be Europe and the US agreeing sanctions that would exclude Russia from the Swiss settlement system. If that happens, then I think we will see further escalation of geopolitical risk, but at the moment it’s more talk than walk as far as the markets are concerned. We continue to watch Ukraine and the build-up of Russian soldiers there, as it is the key threat to a pro-bonds, pro-equities, anti-cash environment.

Economic Summary for the week ended 20th June 2014

China - Foreign investment in China fell in May to its lowest level in 16 months, partly due to slowing growth. The government says China attracted $8.6bn in foreign direct investment (FDI) in May.

That is a 6.7% fall from the same period last year and marks China's weakest FDI report since January 2013.

Economists say prospects of slower growth in the world's second-largest economy may have deterred foreign investors.

China's economy expanded at the pace of 7.4% in the first three months of this year, down from 7.7% growth in the previous quarter.

U.S. - The International Monetary Fund (IMF) has slashed its U.S. growth forecast, urging policy makers to keep interest rates low and raise the minimum wage to strengthen its recovery.

The crisis lender said it expects 2% growth this year, down from its April forecast of 2.8%, after a "harsh winter" led to a weak first quarter. However it expects 3% growth in 2015.

It also said the U.S. should increase its minimum wage to help address its 15% poverty rate.

"Given its current low level (compared both to US history and international standards), the minimum wage should be increased," the IMF said in its annual assessment of the U.S. economy.

Argentina - Argentina's stock market closed 4.9% lower on Thursday after the country's cabinet chief said there would be no delegation to the US to negotiate with bondholders over a $1.3bn (£766m) debt.

Earlier this week, a US Supreme Court ruling sided with bondholders demanding Argentina pay them the amount in full.

Argentina defaulted on debts in 2001 following a severe economic crisis.

It has been in a legal battle with a number of US hedge funds which lent money to the country.

Many hedge funds have agreed to accept a partial repayment, but others, led by NML and Aurelius Capital Management, are demanding payment in full.

Commodities - India has taken over from the U.S. as the largest importer of Nigerian oil, the West African state's national oil company has said.

The US has "drastically reduced" its demand for Nigeria's crude oil in recent months, the Nigerian National Oil Corporation said. The country is currently buying about 250,000 barrels a day.

India now buys considerably more - about 30% of the country's 2.5 million barrels of production.

U.S. demand for imported oil has fallen sharply because of increasing domestic shale gas and oil production - so much so that the International Energy Agency and oil giant BP both forecast that the country will be largely energy independent by 2035.

Commodities - Investors are moving back towards safe haven assets such as gold as ongoing violence in Iraq hits markets.

Gold climbed to a three-week high of $1,282 an ounce on Thursday, a 0.6% increase and the fifth day of gains as Iraqi insurgents seized control in parts of the country. The metal has risen 6.7% this year on tensions between Russia and Ukraine.

Silver, palladium, and platinum also saw a rise, with silver reaching a one-month high of $19.8 last week.

On Friday, Brent crude oil passed its previous high of $114 per barrel after Iraqi militants threatened to halt repairs to an oil pipeline.

Spotlight on: Will ISIS push oil prices to critical point?

Escalating violence in the Middle East could impact global economic activity as oil prices continues to climb.

In the past week, the Islamic State of Iraq and al Sham has taken several northern Iraqi cities by force and despite the fact the majority of Iraqi oil fields are located in the south of the country, this violence has already made investors nervous.

Capital Economics chief emerging markets economist Neil Shearing says: “The unfolding crisis in Iraq has cast a shadow over the region, causing equity markets to tumble. As it happens, the largest Middle-east and north African economies have only limited trade and financial ties with Iraq, meaning that, in aggregate at least, the economic spillovers should be fairly small.

“But some countries, such as Jordan, do have relatively large trade ties with Iraq while in others, such as Lebanon, the crisis could exacerbate existing sectarian divisions.”

Outside of the region, the price of oil is being negatively impacted by this surge in Iraqi violence and could impact global investors.

The Brent Crude oil benchmark currently pegs the price of oil per barrel as $115.06, very close to the “critical” $120 per barrel level according to Old Mutual Global Investors fund manager Richard Buxton.

Buxton, who manages the £1.4bn Old Mutual UK Alpha fund, says: “Ongoing conflicts in the middle east are absolutely at the top of the worry list. We have been concerned all year about this but this is clearly spilling out in a much more dramatic fashion.

“Oil is currently hovering below that critical $120 per barrel level which we have seen several times in recent years. If it goes over this it slows in terms of economic activity. We have to keep a very close eye on this and it would have a very material impact.”

BlackRock global chief investment strategist Russ Koesterich argues a prolonged price rise in oil would pile additional pressure onto the global economy as it suppresses stocks and raises volatility.

As a result, Koesterich says: “Higher oil prices, coupled with still reasonable valuations in the sector, support a continued overweight to energy stocks.

“At the same time, higher oil and gas prices represent yet another headwind for a consumer already struggling with slow wage growth and high personal debt. In a world of modest growth and a strapped consumer, we believe a cautious view toward consumer discretionary companies is warranted.”

With debate now raging as to the possibility of western intervention into Iraq, Ashmore head of research Jan Dehn sees a resolution to this crisis via this route as unlikely due to past geopolitical crises.

Dehn says: “The west’s loss of moral authority to act has already inflicted diplomatic defeats on western powers in the Syrian conflict and over Crimea and in Georgia. “We see very little chance that the west will be able to significantly ramp up its influence in the region from current levels, which means that the west’s most important allies increasingly have to rely on their own financial and military means to see off the threat to their rule from militants.”