Itaú BBA - Market Conditions Index - Financial conditions deteriorate in March

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Market Conditions Index - Financial conditions deteriorate in March

April 2, 2018

Financial conditions in the region as a whole deteriorated at the margin

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 deteriorated at the margin, declining to 0.27 from 0.60 in February, reflecting the global risk aversion in a scenario of uncertainty in US-China trade relations. Still, the three-month moving average rose to 0.58 (from 0.37 in the previous month). In Brazil and Peru, the deterioration in the conditions was influenced by negative contributions from the commodities component. In Mexico and Colombia, the decline is explained by falling stock markets. Chile, on the other hand, showed an improvement in its financial conditions, supported by higher copper prices and the exchange rate appreciation.

Brazilian market conditions declined at the end of March vis-à-vis the end of February. The Itaú Unibanco Market Conditions Index (IU-MCI)  dropped to 0.07, from 0.59 previously. The exchange rate and the 5-year CDS also contributed negatively in the month, while the yield curve flattening delivered a positive contribution. The impact of commodity prices, although not homogeneous, was predominantly negative for financial conditions.

Breaking down the IU-MCI, the Brazilian financial variables subcomponent climbed to 0.87 (from 0.76 in the previous month). The three-month moving average also increased, to 0.99 compared to 0.83 in February.

In order to analyze the facts 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 (see Table 1 in the Appendix). The chart below shows that factors related to peer countries account for most of the deterioration in financial conditions; on the other hand, the contribution from idiosyncratic factors was positive, although it lost strength in the latter part of the month. This composition is consistent with the increase in risk aversion in global markets.

The commodity prices subcomponent ended February at -0.20, down from 0.52 in the previous month. However, the three-month moving average advanced to 0.47, from 0.18 in February.

Our market conditions indexes are available on Bloomberg:

Itaú Unibanco market conditions index: IUMCBR Index.
Subcomponent - Brazilian financial variables: IUMCBRFV Index.
Subcomponent - Commodities: IUMCCMDT Index.


[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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