Itaú BBA - Market Conditions Index - Market conditions deteriorate in November

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Market Conditions Index - Market conditions deteriorate in November

noviembre 30, 2017

In Brazil, the Itaú Unibanco Market Conditions Index dropped to 0.17 from 0.41.

The Itaú Unibanco LatAm Market Conditions Index 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.

Financial conditions in the region as a whole improved at the margin to 0.26 (from 0.12 in October), despite mixed readings across different countries. The three-month moving average slipped to 0.50 from 0.61 in the previous month. Financial conditions in Mexico and Colombia — supported by currency appreciation and rising oil prices — contributed to the pickup during the month. Meanwhile, Brazil (with the declines in the commodity and financial condition components), Chile (currency depreciation, falling stock market and lower copper prices) and Peru (falling stocks and lower copper prices) moved in the opposite direction.

Brazilian market conditions decelerated at the end of November vis-à-vis the end of October. The Itaú Unibanco Market Conditions Index (IU-MCI)1dropped to 0.17 from 0.41, dragged mainly by declines in financial variables (-0.36 points) and commodities (-0.14 points). Nevertheless, the three-month moving average was nearly stable, at 0.92.
Breaking down the IU-MCI, the Brazilian financial variables subcomponent receded to 0.43 (vs. 0.79 in the previous month), due to interest rate moves and a falling stock market. Despite the adjustment at the margin, the three-month moving average expanded somewhat to 1.52 from 1.48.

In order to analyze the facts 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 idiosyncratic factors related to Brazil continue to contribute positively to domestic financial conditions.

The commodity prices subcomponent closed November near the neutral level, at 0.02, declining from 0.16 in the previous month. Still, the moving average was virtually neutral, at 0.49.


Our market conditions indexes are available on Bloomberg:

Itaú Unibanco market conditions index: IUMCBR Index.
Subcomponent - Brazilian financial variables: IUMCBRFV Index.
Subcomponent - Commodities: IUMCCMDT Index.


[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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