Itaú BBA - Market Conditions Index - More expansionary given the improvement in commodities

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Market Conditions Index - More expansionary given the improvement in commodities

agosto 1, 2017

The Itaú Unibanco Market Conditions Index (IU-MCI) advanced to 0.36 in July from -0.31 in the previous month.

Please see the attached file for all graphs.

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 advanced to 0.56 (from -0.17 in June). Thus, the three-month moving average reached -0.16 (compared to -0.03 in the previous month). The positive result was widespread among the LatAm countries, with positive contributions from Brazil (with an increase in commodities in spite of a drop in financial conditions), Colombia (due to the improvement in oil prices), Mexico (with improvement in most components), Peru (widespread improvement in its components), and Chile (higher copper prices).

Brazilian market conditions recovered at the end of July, compared to the end of June. The Itaú Unibanco Market Conditions Index (IU-MCI)[1]  advanced to 0.36 from -0.31. The movement was explained by an improvement in commodity prices, although the financial variables contributed negatively in the month. As a result, the three-month moving average fell to -0.48 from -0.39, keeping its distance from the neutral level.

Breaking down the IU-MCI, the Brazilian financial variables subcomponent fell to -0.12 in July, from 0.06 at the end of June. The movement is still a reflection of the cloudier political scenario, with a probable postponement of reforms, hindering fiscal rebalancing and consequently impacting confidence levels and asset prices. As a result, the three-month moving average followed in the same direction, dropping to 0.21 from 0.30.

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 ’ data[2] (see Table 1 in the Appendix). The chart below shows that most of the recent decline is related to domestic factors, while there was an improvement in factors related to peer countries.

The commodity prices subcomponent ended July at 0.54, an improvement over the previous month (-0.41). The result reflects the rise in most agricultural and energy commodities. Thus, the moving average fell to -0.75 in July from -0.67 in June.


André Matcin


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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