Itaú BBA - Market Conditions Index - Financial variables remain at expansionary levels

Macro Vision

< Back

Market Conditions Index - Financial variables remain at expansionary levels

September 29, 2017

The Itaú Unibanco Market Conditions Index (IU-MCI) fell to 0.72 from 0.86

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 at the margin, reaching 0.55 (from 0.69 in August), but remain in expansionary territory. As a result, the three-month moving average reached 0.47 (from 0.17 in the previous month). The contributions to the slowdown in the month came from Brazil (with a drop in financial factors and commodities), Mexico (stock market decline and currency depreciation) and Peru (currency depreciation and decline in gold and copper prices). On the positive/neutral side, we highlight the increase in Colombia (with the improvement in oil prices) and stability of the indicator in Chile.

Brazilian market conditions slowed down at the end of September, compared to the end of August. The Itaú Unibanco Market Conditions Index (IU-MCI)[1] fell to 0.72 from 0.86. The movement was explained by declines in both financial variables and commodities. Despite this fact, the three-month moving average advanced from -0.04 to 0.50, at expansionary levels for financial conditions.

Breaking down the IU-MCI, the Brazilian financial variables subcomponent declined at the margin, reaching 1.26 (from 1.50 in the previous month). The result reflects movements in the interest rate and CDS markets, as well as the more depreciated currency, in a context of a stronger U.S. dollar globally, following the Fomc's greater willingness to deliver another rate hike (0.25p.p.) in the U.S. economy later this year. On the opposite side, the stock exchange continues to contribute positively to the financial conditions in Brazil. Despite the adjustment at the margin, the three-month moving average continued to expand, from 0.54 to 1.10.

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 idiosyncratic factors related to Brazil continue to contribute positively to the performance of domestic financial conditions. On the other hand, we note that both idiosyncratic factors and those related to peer countries slowed down at the margin.

The commodities prices subcomponent closes September at 0.34, a slight decrease from the previous month (0.41). As a result, the moving average rose from -0.33 in August to 0.13 in September, now in expansionary territory.


 


 

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.


 

 



< Back