Itaú BBA - Market Conditions Index - Market environment worsens in May

Macro Vision

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Market Conditions Index - Market environment worsens in May

mayo 31, 2016

The IU-MCI is consistent with economic activity stabilization, starting in the second half of 2016

Please see the attached file for all graphs. 

The market environment in Brazil worsened in May, but remains expansionary territory. The Itaú Unibanco Market Conditions Index[1] (IU-MCI) went to 0.41 at the end of the month from 2.11 at the end of April (Chart 1). Despite that, the three months moving average went to 1.35 from 0.41, due to the previous months’ improvement.

The deterioration in May was driven by the Brazilian financial variables subcomponent, which declined to -0.38 at the end of May (Chart 2) from 2.06 at the end of April. The 5% BRL depreciation and the 9% drop in the Ibovespa index explain this change. The financial variables’ deterioration in May was not enough to reverse the moving average trend, which rose to 1.72 from 0.63 in the period.

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 recent improvement is related both to factors that affected Brazil and its peers and country-specific factors. According to our calculations, 60% of the movement in the month was due to idiosyncratic factors in Brazil and 40% to external factors.

The commodity prices subcomponent also posted a slight deterioration in May, dropping to 0.74 from 1.8 at the end of April (Chart 4), due to the decline in metal commodity prices. Nevertheless, the moving average increased to 0.94 from 0.22 over the same period.

IU-MCI and economic activity

In order to assess 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). We conclude that the recent months’ improvement, which was not completely offset by May’s retreat, is consistent with economic activity stabilization, starting in the second half of 2016.


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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