Itaú BBA - Market Conditions Index - Another improvement in market conditions

Macro Vision

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Market Conditions Index - Another improvement in market conditions

October 31, 2016

The improvement was due to idiosyncratic factors in Brazil, which boosted the Brazilian financial variables subcomponent.

Please see the attached file for all graphs. 

After remaining stable in recent months, market conditions improved again in October. The Itaú Unibanco Market Conditions Index[1] (IU-MCI) rose to 0.86 in October from 0.33 at the end of September. The improvement was due to idiosyncratic factors in Brazil, which boosted the Brazilian financial variables subcomponent.

 

Looking at the breakdown of IU-MCI, the Brazilian financial variables subcomponent rose to 1.06 in October from 0.13 at the end of September. The 3.0% exchange rate appreciation and the 10% rise in the Ibovespa explain the move. Thus, the three-month moving average rose to 1.06, from 0.83 in September.

In order to analyze the factors behind the recent behavior in the Brazilian market, we have regressed the Brazilian financial variables subcomponent onto a market environment index built from peer countries[2]’ data (see Table 1 in the Appendix). The chart below shows that the component’s improvement in the month was due to idiosyncratic factors in Brazil.

The commodity prices subcomponent also improved in the month, from 0.37 in September to 0.62 in October. The three-month moving average fell to -0.04, from 0.13 in September.

IU-MCI and economic activity

To verify the impact of financial conditions on economic activity, we consider a GDP forecast regression that incorporates the IU-MCI subcomponents (see Table 2 in the Appendix). The recent evolution in market conditions supports our stable growth scenario for the second half of this year.


Laura Pitta



[1] The IU-MCI measures the market conditions in Brazil and is also a good leading indicator of the country's economic growth, according to econometric exercises. The index consists of two sub-components: the first one is composed of Brazilian financial variables - interest rates, exchange rates, country risk measures - and the second is composed of commodity prices. A result above zero means that market conditions are expansionary, and below zero, contractionary.

[2] We consider the exchange rates and stock exchange indexes for 12 peer countries (Australia, Chile, Canada, Mexico, South Africa, Turkey, India, Russia, Peru, Indonesia, Malaysia and Thailand).


 

Please see the attached file for all graphs.



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