Itaú BBA - Market Conditions Index - Market conditions remain expansionary in August

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Market Conditions Index - Market conditions remain expansionary in August

August 31, 2016

The strong improvement in market conditions since April this year suggests an upward bias to GDP growth this year.

Please see the attached file for all graphs. 

Market conditions posted a volatile performance in August. The Itaú Unibanco Market Conditions Index[1] (IU-MCI) started the month on an upward trend, but reverted the movement, ending the month at around the same level observed at the end of July. The indicator remains in expansionary territory, despite a slower pace of improvement than that posted in previous months. Thus, the three-month moving average fell to 0.77, from 1.1 in July.

 

Looking at the breakdown of IU-MCI, the indicator’s volatile behavior in August came from the Brazilian financial variables subcomponent, particularly the evolution of the exchange rate and the Ibovespa index. The exchange rate reached its lowest level in the month at 3.13 reais per dollar, but ended August close to 3.25. The Ibovespa index reached 59 thousand points, but ended the month at around 58,500 points, underscoring gains in the month, but at a slower pace than in recent months. This is reflected in the subcomponent’s decline. In this environment, the three-month moving average decreased slightly to 0.65, from 0.86 in July.

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 idiosyncratic factors in Brazil are still responsible for the subcomponent’s improvement during the month.

The commodity prices subcomponent also ended August at a level similar to that posted at the end of July. Despite growth below its historical average, the three-month moving average remains in expansionary ground, falling to 0.698 in August from 1.06 at the end of July.

 

IU-MCI and economic activity

To verify the impact of financial conditions on economic activity, we consider a GDP forecast regression that incorporates the IU-MCI subcomponents (see Table 2 in the Appendix). The strong improvement in market conditions since April this year suggests an upward bias to GDP growth this year.


 

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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