Itaú BBA - Market Conditions Index - Less expansionary market conditions due to commodities

Macro Vision

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Market Conditions Index - Less expansionary market conditions due to commodities

julio 29, 2016

The expansionary level of the market environment is compatible with our scenario of stabilization of economic activity ahead.

Please see the attached file for all graphs. 

Market conditions in Brazil slightly worsened in July, due to commodities prices. The Itaú Unibanco Market Conditions Index[1] (IU-MCI) decreased from 0.68 at the end of June to 0.06. Thus, the three-month moving average reached 1.14, from 1.54 in June. The indicator remains in expansionary territory, however the pace of improvement is slower than in previous months.

 

Breaking down the IU-MCI, the Brazilian financial variables subcomponent rose to 0.91, from 0.43 at the end of June. The 20 bps drop in country risk, as measured by the five-year CDS, and the 10% increase in the Bovespa index explain the movement. The three-month moving average went from 1.60 at the end of June to 0.90.

 

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 slight improvement in the subcomponent in the month corresponded to Brazil’s idiosyncratic factors.

The commodity prices subcomponent, on the other hand, ended July at -0.37, from 0.69 in the previous month, affected by the drop in energy commodity prices. Thus, the three-month moving average went from 1.26 at the end of June to 1.08 in July.

 

IU-MCI and economic activity

To verify the impact of financial conditions on economic activity, we consider a GDP forecast regression that incorporates the IU-MCI subcomponents (see Table 2 in the Appendix). The expansionary level of the market environment, despite the decline in the month, is compatible with our scenario of stabilization of economic activity growth in the second half of this 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).




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