Itaú BBA - Market Conditions Index - Less expansionary given the drop in commodities

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Market Conditions Index - Less expansionary given the drop in commodities

April 4, 2017

Brazilian market conditions worsened in March, due to a drop in commodity prices.

Please see the attached file for all graphs.

Brazilian market conditions worsened in March. The Itaú Unibanco Market Conditions Index[1] (IU-MCI) fell to -0.08 from 0.69. The decline owes to a drop in commodity prices. The three-month moving average was stable at around 0.58, highlighting the fact that, despite the month’s deterioration, market conditions remain expansionary.

Looking at the IU-MCI breakdown, the Brazilian financial variables subcomponent dropped to 0.47 in March from 1.45 at the end of February. Given previous months’ improvement, the three-month moving average rose to 1.03 from 0.82.

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 recent movement stems largely from idiosyncratic factors affecting Brazil.

The commodity prices subcomponent ended March at -0.44, from 0.03 in the previous month. The decline was widespread among agricultural, energy and metal commodities. Thus, the moving average fell to 0.27 from 0.43 in February.


 

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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