Itaú BBA - Market Conditions Index - More expansionary financial conditions

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Market Conditions Index - More expansionary financial conditions

August 31, 2017

The Itaú Unibanco Market Conditions Index advanced to 0.83 in August from 0.81.

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 slightly to 0.70 (from 0.77 in July). Thus, the three-month moving average reached 0.15 (from -0.07 in the previous month). The increase was widespread among the LatAm countries, with positive contributions from Brazil (with an increase in financial conditions), Colombia (currency appreciation), Peru (widespread improvement in its components, especially gold), and Chile (stock exchange improvement and currency appreciation). At the opposite end, Mexico contributed negatively in the month, influenced by drops in oil prices and the stock market.

Brazilian market conditions recovered at the end of July, compared to the end of June. The Itaú Unibanco Market Conditions Index (IU-MCI)[1] advanced to 0.83 from 0.81. The movement was explained by an improvement in the financial variables, even though commodities contributed negatively in the month. As a result, the three-month moving average advanced to -0.07 from -0.47, approaching the neutral level.

Breaking down the IU-MCI, the Brazilian financial variables subcomponent showed a strong expansion at the margin, reaching 1.49 (compared to 1.09 in the previous month). The movement is a reflection of the increasingly gradual recovery of economic activity, a favorable external environment for emerging assets, and the government's efforts to increase revenues and reduce expenses, in light of a challenging fiscal scenario ahead. As a result, the three-month moving average followed the same direction, rising from 0.21 to 0.51.

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 the strong performance at the margin of idiosyncratic factors related to Brazil, indicating that most of the recent upward movement is related to domestic factors, while the factors related to peer countries posted a slight decrease compared to the previous month.

The commodity prices subcomponent closed August at 0.38, a drop from the previous month (0.55). The result reflects a decline in most agricultural and energy commodities. Still, the moving average rose from -0.75 in July to -0.35 in August.


 

André Matcin


 

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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