Daily Agenda: Catalonia Calls for Independence Referendum from Spain

Dust settles in U.S. equity markets; Brazil credit likely to slow down; more signs of Japanese slowdown.


David Ramos

After yesterday’s sell-off in U.S. equities, investors are recalibrating for different market risk narratives as they attempt to decide what, if anything, changed between Wednesday and Thursday. With initial jobless claims that beat forecasts, core durable August durable goods orders that expanded and strong U.S. purchasing managers’ index (PMI) data, there was little macro justification for stocks to swoon. If anything, the dovish Wednesday evening speech by Chicago Federal Reserve President Charles Evans provided more fodder for the bulls. While some strategists continue to comment on historically high valuation multiples, few have called for a significant correction. Regardless of what sparked yesterday’s sell-off, with a high of 15.6 for the day the Chicago Board Options Exchange Volatility Index (VIX) seemed to indicate that, whatever the catalyst for the bears, there was no panic among traders as they eyed the exit door.

Catalonia calls for independence vote from Spain. Artur Mas, the president of the Spanish autonomous region of Catalonia, is expected to sign a decree calling for a Catalan independence referendum, a move that the government in Madrid views illegal. A vote in favor of breaking away from Spain — a move that some observers expected would follow the September 18 Scottish independence referendum — will be a key test for the European Union as it may set a course for nationalist movements elsewhere in the EU.

Plenty of U.S. economic data points to be released today. U.S. macro data points on deck today include revised second-quarter gross domestic product, August consumer credit and September University of Michigan consumer sentiment index levels. Consensus forecasts are for an improvement in the final growth reading with a focus on non residential fixed investments and inventories, categories that exhibited strength in initial estimates.

German consumer sentiment on the wane. GfK consumer sentiment indexes for August released today added to concerns over soft retail activity in the region. The headline index registered below consensus forecasts at 8.3.

Credit likely to decelerate in Brazil. August Brazil lending data is due out today. Total outstanding credit slowed to 11.4 percent for July and despite Central Bank of Brazil liquidity measures intended to spur more private-sector borrowing, economists’ consensus forecasts are calling for the pace of credit growth to moderate further on lower general activity in the economy.


Abenomics continues to come under pressure. Consumer price inflation levels in Japan, excluding fresh foods, rose to an annualized 3.1 percent in August, below consensus forecasts. This is only the latest data point indicating slowing consumption patterns after the most recent tax hikes, despite historic liquidity measures taken by the central bank.

Portfolio Perspective: Making the Case for BDCs as a Source of Yield IncomeGrier Eliasek, Prospect Capital Corp.

In an era of rock-bottom interest rates, investors desperate for yield income are increasingly dashing to closed-end funds (CEFs). Assets in CEFs have climbed more than 6 percent in the first two quarters of this year compared to 2013. But a superior yet underutilized source of yield income are business development companies (BDCs).

BDCs and CEFs are both regulated by the Investment Company Act of 1940, which calls for reporting transparency and SEC oversight. Both are required to distribute 90 percent of their income to shareholders and to meet certain diversity and portfolio control requirements in order to avoid corporate taxation. But BDCs can leverage up to 1-time debt-to-equity, while CEFs are capped at 0.5 times. More borrowing power allows BDCs to invest in more assets. As a result, BDCs often pay dividend yields of 8 to 12 percent, several hundred basis points higher than the yields of CEFs, exchange-traded funds, master limited partnerships, real estate investment trusts and utilities.

BDCs stand to benefit from rising interest rates, as they lend to private companies at floating interest rates and will earn more interest income as rates rise. Their senior-secured loans offer limited risk because the loans are backed by hard assets such as property, equipment and cash flows. In case of default, BDCs would be the first in line for repayment.

Grier Eliasek is the president and chief operating officer at Prospect Capital Corp., a firm that provides private debt and equity capital, in New York.