Itaú BBA - Market conditions remain expansionary, despite global uncertainties

Macro Vision

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Market conditions remain expansionary, despite global uncertainties

June 30, 2016

Despite global uncertainties, IU-MCI is in line with our view of stabilization in economy activity in the 2nd half of the year.

Please see the attached file for all graphs. 

Market conditions were volatile in Brazil in June. The Itaú Unibanco Market Conditions Index[1] (IU-MCI) started the month extending May’s improvement. However, part of the movement was erased and the indicator ended June at 0.72, only slightly above the previous month’s reading (Chart 1). Nevertheless, the 3-month moving average advanced to 1.54 from 1.39, signaling that market conditions remain expansionary.

Breaking down the IU-MCI, the Brazilian financial variables subcomponent climbed to 0.39 from -0.40 in May (Chart 2). The highlight was the strong appreciation of the exchange rate that occurred recently. However, there was not a general improvement in financial variables in Brazil as in the beginning of the year. Market interest rates, for example, follow at levels close to the end of April. The 3-month moving average receded somewhat to 1.61 from 1.76 in May.

In order to analyze the factors behind the recent behavior in the Brazilian market, we have regressed the Brazilian financial variables subcomponent into a market environment index built from peer countries[2]’ data (see Table 1 in the Appendix). Chart 3 shows that the slight improvement in the subcomponent during the month was related to factors that are idiosyncratic to Brazil. The move took place despite a more adverse global environment, which affected both Brazil and its peers. 

Another subcomponent of the IU-MCI, commodity prices, ended June virtually at the level seen in May (Chart 4). Nevertheless, the 3-month moving average rose to 1.25 in June from 0.98 in May.

IU-MCI and economic activity

In order to verify the impact of financial conditions on economic activity, we assume a GDP forecast regression that incorporates the IU-MCI subcomponents (see Table 2 in the appendix). Market conditions at expansionary levels, notwithstanding global uncertainties, are in line with our expectation of stabilization in economic activity growth in the second half of the year.

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).


Please see the attached file for all graphs. 


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