Itaú BBA - Market Conditions Index - Significant improvement in market conditions in January

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Market Conditions Index - Significant improvement in market conditions in January

January 31, 2018

Widespread global growth with low volatility contributed to the improvement in the financial conditions index.

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 advanced at the margin, reaching 0.97 (from 0.10 in December), reflecting the improvement of financial conditions in most of the countries tracked. Thus, the three-month moving average rose to 0.27 (from 0.22 in the previous month). Financial conditions in Mexico (mainly driven by the exchange rate appreciation), Colombia (currency appreciation and stock market improvement), Peru (rising stock market and gold prices) and Chile (exchange rate appreciation and increase in copper prices) contributed to the acceleration in the month. Brazil posted strong growth in the month (with a robust increase in financial variables and a slight increase in the commodities component).

Brazilian market conditions posted strong growth at the end of January vis-à-vis the end of December. The Itaú Unibanco Market Conditions Index (IU-MCI)[1] advanced from 0.27 to 0.78. The movement was explained by the increase in financial variables, mainly the stock exchange gain. On the other hand, there was deterioration in some agricultural commodity components such as sugar and cotton. Thus, the three-month moving average for the indicator declined in January to 0.41, from 0.54.

Breaking down the IU-MCI, the Brazilian financial variables subcomponent reached 0.95 (compared to 0.30 in the previous month). Still, the three-month moving average slipped to 0.86, from 1.12 in December.

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 factors related to peer countries explain almost the entire positive contribution to the performance of domestic financial conditions, while the contribution from idiosyncratic factors related to Brazil are at neutral levels. This composition is consistent with the context of Widespread global growth with low volatility contributed to the improvement in the financial condition index., providing flows to emerging markets.

The commodity prices subcomponent ends January at 0.80, up from 0.44 in the previous month. Nonetheless, the three-month moving average fell to 0.13, from 0.18 in December.

 

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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