Itaú BBA - Market Conditions Index - Strong improvement in January

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Market Conditions Index - Strong improvement in January

February 1, 2017

The movement was driven by both Brazilian financial variables and commodity prices.

Market conditions improved sharply in January. The Itaú Unibanco Market Conditions Index[1] (IU-MCI) went to 0.63 from -0.02 in December. The movement was driven by both Brazilian financial variables and commodity prices. Nonetheless, the three-month moving average was flat  around 0.58.

The Brazilian financial variables subcomponent climbed to 1.22 in January from 0.02 at the end of December. The improvement was widespread among the assets that make up the subcomponent. As highlights, the IBovespa index increased 7%, the exchange rate appreciated 3% and the 5-year CDS, measuring country risk, dropped 30 bps. Despite these figures, the three-month moving average gently slipped to 0.70 from 0.83 in December, reflecting the evolution of previous months.


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 recent improvement stems both from idiosyncratic factors affecting Brazil and those affecting peer countries.

Given the rising prices of agricultural and metal commodities, the commodity prices subcomponent also improved in January, to 0.37 from -0.01 in December. The moving average was flat at around 0.42.

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).



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