Itaú BBA - Market Conditions Index - Brazilian financial variables decline in June

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Market Conditions Index - Brazilian financial variables decline in June

June 29, 2017

The movement is a product of deterioration in both commodity prices and financial variables.

Please see the attached file for all graphs.

The Itaú Unibanco LatAm Market Conditions Index measures the overall market conditions of Latin American countries (Brazil, Mexico, Colombia, Chile, Peru). In building the index, we replicated the methodology (see end of report) used for Brazil for the other Latin American countries, and applied weights based on the size of each country's economy, as measured by GDP.

Financial conditions in the region as a whole declined to -0.43 (from 0.01 in May). Thus, the three-month moving average fell to 0.00 from 0.20, influenced by a deterioration in Brazil (with declines in both financial conditions and commodities), Colombia (influenced by the fall of the stock market and oil), and Mexico (with deterioration in most components). Peru was the positive highlight of the month, with recent currency appreciation, reduction of country risk and improvement in copper prices, positively impacting the country’s financial conditions.

Brazilian market conditions deteriorated at the end of June vis-à-vis the end of May. The Itaú Unibanco Market Conditions Index (IU-MCI)[1] fell to -0.75 from -0.28. The movement results from a deterioration in both commodity prices and financial variables. The three-month moving average declined to -0.35 from 0.02, moving away from the neutral level posted in the previous month.

Breaking down the IU-MCI, the Brazilian financial variables subcomponent fell to -0.17 in June from 0.06 at the end of May. The movement reflects the cloudier political scenario, which will likely delay reforms, hindering fiscal rebalancing and consequently impacting confidence levels and asset prices. As a result, the three-month moving average followed in the same direction, dropping to 0.32 from 0.71.

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’ data[2] (see Table 1 in the Appendix). The chart below shows that, once again, most of the recent movement is related to domestic factors.

The commodity prices subcomponent closed June at -0.69, worsening from -0.45 in the previous month. The result reflects the drop in agricultural and energy commodities. Thus, the moving average retreated from -0.33 in May to -0.62 in June.


 

André Matcin



[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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