Itaú BBA - Market Conditions Index - Volatility strikes Brazilian financial variables in May

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Market Conditions Index - Volatility strikes Brazilian financial variables in May

June 2, 2017

The Brazilian financial variables subcomponent deteriorated, presenting volatility in face of political uncertainty.

Please see the attached file for all graphs.

In this issue, we present the Itaú Unibanco LatAm Market Conditions Index, which 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.

Market conditions in the region as a whole marginally improved to 0.01 from -0.06. However, the general trend as measured by the three-month moving average worsened to 0.20 from 0.42, influenced by Brazil (which saw a deterioration in both financial conditions and commodities), Colombia (impacted by the depreciated exchange rate and falling oil prices), and Peru (with the majority of components deteriorating). Mexico was the positive highlight, with the recent appreciation of the Mexican peso positively impacting financial conditions.   

Brazilian market conditions improved at the end of May vis-à-vis the end of April. The Itaú Unibanco Market Conditions Index[1] (IU-MCI) rose to -0.28 from -0.45. This movement is a product of a milder decline in commodity prices compared to the previous month, which more than compensated the worsening of financial variables (section ahead). The three-month moving average declined to 0.02 from 0.48, which is consistent with market conditions near neutral levels. 

Breaking down the IU-MCI, the Brazilian financial variables subcomponent dropped to 0.06 in May from 0.24 at the end April. This subcomponent was volatile during the month, reaching a maximum of 0.79 and a minimum of -0.28, in face of the recent increase in political uncertainty. The three-month moving average also retreated, falling to 0.71 from 1.02.

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 movement stems largely from idiosyncratic factors affecting Brazil.

The commodity prices subcomponent ended the month of May at -0.40, improving from -0.72 in April. The advance owes to a milder decline in agricultural and energy commodities. Due to past months’ effect on the three-month moving average, this metric declined to -0.33 from 0.13 in April.


Lourenço Paiva


[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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