Itaú BBA - Market Conditions Index - Market conditions deteriorate in October

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Market Conditions Index - Market conditions deteriorate in October

November 1, 2017

In October, the Itaú Unibanco Market Conditions Index dropped to 0.36 from 0.54 in the previous month

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 receded at the margin to -0.04 (down from 0.55 in September), and are now close to neutral territory. Nevertheless, the three-month moving average reached 0.59 (vs. 0.50 in the previous  month). Brazil (with declines in the financial and commodity components), Mexico (falling stock market and exchange rate depreciation) and Colombia (falling stock market and exchange rate depreciation) contributed to the slowdown during the month. Meanwhile, Chile (rising stock market, offsetting the lower copper prices) and Peru (overall improvement across components, except for the sliding gold price) stood out positively.

Brazilian market conditions decelerated at the end of October vis-à-vis the end of September. The Itaú Unibanco Market Conditions Index (IU-MCI)[1] dropped to 0.36 from 0.54, dragged mainly by declines in financial variables (-0.34 points) but also commodities (-0.09 points). Still, the three-month moving average climbed to 0.78 from 0.49.

Breaking down the IU-MCI, the Brazilian financial variables subcomponent receded at the margin to 0.73 (vs. 1.06 in the previous month), due to interest rate moves and a weaker currency (in a context of a stronger dollar globally, given the greater market perception of tax reform approval and better inflation readings in the U.S.). Despite the adjustment at the margin, the three-month moving average continued to expand, rising to 1.50 from 1.15.

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 domestic financial conditions. On the other hand, we note that both factors — idiosyncratic and those related to its peer countries — slowed down at the margin.

The commodity prices subcomponent closed October at 0.13, declining somewhat from 0.22 in the previous month. Nevertheless, the moving average advanced to 0.48 in October from 0.17 in September.

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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