Itaú BBA - Market Conditions Index - Substantial improvement in market conditions in March

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Market Conditions Index - Substantial improvement in market conditions in March

March 31, 2016

The IU-MCI is consistent with our scenario of 4.0% GDP contraction in 2016.

Please see the attached file for all graphs. 

Market conditions in Brazil saw a strong improvement in March. The Itaú Unibanco Market Conditions Index[1] (IU-MCI) returned to positive territory for the first time since September 2015, going from -0.11 at the end of February to 1.45 at the end of March (Chart 1). The recent improvement had a slight effect on the three-month moving average, which rose to -0.88, from -1.38 at the end of February.  

The Brazilian financial variables subcomponent went from 0.02 at the end of February to 2.13 at the end of March (Chart 2). The improvement was widespread among the variables that make up the subcomponent; the 20% increase in the Ibovespa index and the 10% exchange rate appreciation in the period were highlights. The three-month moving average also improved, from -1.32 to -0.79 at the end of March.

In order to analyze the origin of the improvement in the Brazilian market, we regressed the Brazilian financial variables subcomponent into a market-conditions index built from data from peer countries[2] (see regression in Table 1 in the Appendix). Chart 3 shows that the recent improvement is related to factors that affected both Brazil and its peers and also to the country’s idiosyncratic factors, showing the international scenario’s influence and the greater likelihood of a scenario of adjustments and reforms in Brazil.

The other IU-MCI subcomponent, commodity prices, also posted a strong improvement in the month. Highlights came from agricultural and energy commodities. The subcomponent went from 0.11 at the end of February to 0.87 at the end of March. The three-month moving average posted a slight decrease to -1.17, from -0.78 at the end of February (Chart 4).

IU-MCI and economic activity 

In order to verify the impact of market conditions on economic activity, we consider a GDP forecast regression that incorporates the IU-MCI subcomponents (see Table 2 in the Appendix). If the indicator remains at the current level at-the-day and other variables behave according to our baseline scenario[3], the IU-MCI is consistent with our scenario of 4.0% GDP contraction in 2016.



[1] The IU-IMC measures the market environment 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 - while the second one 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).

[3] See: After the storm


 


 

Please see the attached file for all graphs. 


 



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