Itaú BBA - Market Conditions Index - Financial conditions deteriorate on global headwinds

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Market Conditions Index - Financial conditions deteriorate on global headwinds

February 28, 2018

Financial conditions in the region deteriorated at the margin, reflecting the global risk-off event of early February

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, dropping to 0.60 from 0.93 in January, reflecting the global risk-off event of early February. Still, the three-month moving average increased to 0.38 (from 0.26 in the previous month). Financial conditions deteriorated all across LatAm, particularly in Mexico (mainly on the back of to the stock market weakening), Colombia (equities rout) and Brazil (weaker currency and higher risk premiums). Chile’s financial conditions index bucked the regional trend, supported by higher copper prices and a stronger stock market.

Brazilian market conditions retraced at the end of February vis-à-vis the end of January. The Itaú Unibanco Market Conditions Index (IU-MCI)[1] dropped to 0.60 from 0.75 previously. The exchange rate accounted for a large share of the movement, as well as wider credit spreads. Commodity prices painted a mixed picture, but overall had a positive contribution for Financial Conditions. The three-month moving average for the indicator moved sideways in February (0.44, from 0.41).

Breaking down the IU-MCI, the Brazilian financial variables subcomponent fell to 0.67 (compared to 0.86 in the previous month). The three-month moving average slipped less steeply (0.83, from 0.87 in January).

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[2]’ data (see Table 1 in the Appendix). The chart below shows that factors related to peer countries explain the bulk of the financial conditions deterioration; in contrast, the contribution from idiosyncratic factors was actually positive. This composition is consistent with the sharp increase in risk aversion that swept global markets in February and heavily impacted Emerging Markets financial conditions.

 

The commodity prices subcomponent ended February at 0.53, down from 0.78 in the previous month. Nonetheless, the three-month moving average slightly increased to 0.18, from 0.13 in January.

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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