5 Reasons Why Short-Term Municipal Bonds Make Sense Now

Weaknesses

• Copper fell to a three-month low this week on the London Metal Exchange. Lower Chinese growth prospects continue to weigh on the metal. Positive new home sales data out of the U.S. however, which is the second-largest copper consumer, could create some positive momentum for copper prices.
• The strong U.S. dollar continues to depress commodities across the board. Energy has been particularly weak, with the S&P 500 Energy Sector Index declining 2.36 percent for the week.
• Global growth concerns continue to weigh on industrial metals. The S&P/TSX Capped Diversified Metals and Mining Index declined for the fifth-straight week, down 2.16 percent.

Opportunities

• Rising ethylene prices may be positive for certain chemical companies such as LyondellBasell Industries. Ethylene margins in the U.S. have reached new highs as prices for raw materials have declined, such as ethane, which has declined roughly 18 percent from the second to third quarter. 11 percent of ethylene capacity remains offline, placing further upward pressure on ethylene prices.
• Suncor Energy is looking to move crude across the Atlantic Ocean in an effort to seek buyers outside of North America. The oil producer reportedly loaded its first eastward-bound tanker of heavy crude this week.
• This week the World Gold Council announced that it expects 2014 to end on a good note for gold. They argue that despite the challenging first half of the year for the precious metal, robust demand from India throughout wedding season may lift gold demand during the second half of the year.

Threats

• The top threat facing commodities right now continues to be a strong U.S. dollar, which has appreciated more than 7 percent since the start of July. Given the severity of the dollar’s almost-unchecked recent rise, the odds of a near-term pause or consolidation have likely increased.
• Despite positive economic data from the United States, markets remain worried about growth in Europe and China. Any real or perceived threat to global growth, regardless of a strengthening U.S. economy, remains a threat to commodities, especially to industrial metals.

Emerging Markets

Strengths

• Chinese domestic A-shares were among the best performers in emerging markets this week, as new weekly account openings registered the largest gains in more than two years, ahead of the Shanghai-Hong Kong Stock Connect program.  China’s flash manufacturing purchasing managers’ index (PMI) for September came in better than expected this week, and investors speculated that the country’s central bank governor may soon be replaced.
• Thailand continued to outperform the rest of Asia this week, as the junta prime minister reiterated plans to accelerate budget spending to boost the economy and job creation in rural areas over the next three months. The leader also plans to extend the price freeze on consumer goods by another two to three months.  September foreign fund flows into Thai equities were the most since December 2012.
• The consumer staples sector was the best performer in emerging markets this week. Investors rotated to defensive sectors, curbing their risk appetite in anticipation of tighter global liquidity brought on by a stronger U.S. dollar.

Weaknesses

• According to Bloomberg, Greek stocks suffered this week as lending to households and businesses fell 3.5 percent year-over-year in August. The Greek financial system remains under considerable pressure as investors await the results of the European Central Bank’s (ECB) most recent stress test to be released next month. Greece’s current account deficit widened 11 percent in the first seven months of the year from the same period a year ago. The Athens Stock Exchange General Index fell 5.41 percent this week.
• Colombian equities remain depressed after the government announced it’s seeking a higher wealth tax for top income earners. Reporting negative GDP growth in the second quarter, Colombia has seen its stock market decline substantially over the past weeks.
• South African equities suffered this week, led by a declining materials sector. A continually rising dollar has weighed substantially on the South African markets, which traditionally decline the most as the dollar rises. The FTSE/JSE Africa All Share Index declined 3.50 percent this week.

Opportunities

• Growth of China’s online education market is poised to accelerate in the next three years. The expected growth is led by rapid user adoption in an underpenetrated industry, where fewer than 11 percent of Internet users in the country participate in online education.  Leading providers of Internet-based vocational training should be among the biggest beneficiaries of this trend, thanks to government policy support, a scalable business model and relevancy to the job market.

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• Since 2005, two weeks before a large-scale initial public offering (IPO), Chinese equities have tended to underperform the Asian universe by approximately 1 percent. One month after such an event, the Asian universe outperformed by 2 percent on average, according to research from Goldman Sachs. If history is used as a guide, recent profit taking in Chinese ADRs associated with Alibaba’s mega-IPO could be short lived.
• Vietnam may look attractive to global investors who are seeking exposure to secular-growth frontier markets for a number of reasons: (1) currency stability amid last year’s Southeast Asian mini-crisis, (2) growth recovery led by an improving current account balance and domestic infrastructure spending, and (3) one of the lowest labor wages in developing Asia, adjusted for literacy and skill level.

Threats

• Colombia continues to face economic headwinds. Oil prices have declined substantially with the recent spike in the U.S. dollar, and there are mounting concerns that this decline could depress the country’s oil revenue in the coming months.
• Stronger economic data out of the United States continues to weigh on emerging markets. Strong second-quarter GDP growth and new home sales are viewed as evidence that the Federal Reserve will raise rates sooner than expected. Fear over higher rates in the U.S. is already causing a decline in emerging market equities and will likely continue to do so moving forward.
• Commodities and emerging markets have faced considerable headwinds from the stronger dollar, which shows no sign of slowing down. Countries that peg their currency to the dollar are now facing increased pressure to reduce domestic liquidity, primarily by raising rates in order to keep up with the appreciating U.S. currency.

Leaders and Laggards

The tables show the weekly, monthly and quarterly performance statistics of major equity and commodity market benchmarks of our family of funds.