Itaú BBA - Market Conditions Index - Market Conditions remain expansionary in February

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Market Conditions Index - Market Conditions remain expansionary in February

February 24, 2017

The IU-MCI was virtually flat in February and remained expansionary.

Please see the attached file for all graphs.

The Itaú Unibanco Market Conditions Index[1] (IU-MCI) was virtually flat in February. The three-month moving average rose from 0.57 to 0.63, reinforcing that market conditions remain expansionary.

The Brazilian financial variables subcomponent increased from 1.21 at the end of January to 1.47 in February. The improvement was widespread among the assets that make up the subcomponent, with a highlight to a 4% increase in the IBovespa index (which returned to levels observed in early 2012), the 3% appreciation in the exchange rate and the 30 bps drop in country risk as measured by the 5-year CDS. Given the improvement in the previous months, the three-month moving average rose from 0.69 to 0.81.

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 most of the recent improvement stems both from idiosyncratic factors affecting Brazil and those affecting peer countries, reinforcing the influence of external factors.

The commodity prices subcomponent fell slightly in February, from 0.37 in January to 0.22, indicating a softer pace of price increases. The moving average was stable at around 0.44.

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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