Itaú BBA - Market Conditions Index - Slight improvement in Brazil’s market conditions in December

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Market Conditions Index - Slight improvement in Brazil’s market conditions in December

diciembre 28, 2017

The Itaú Unibanco Market Conditions climbed to 0.23 in December from 0.15 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 declined at the margin to 0.07 (from 0.24 in November), amid receding financial conditions in most countries tracked. As a result, the three-month moving average declined to 0.22 from 0.50 in the previous month. Financial conditions in Mexico (influenced by a weakening exchange rate), Chile (falling stock market) and Peru (stock market losses and exchange rate depreciation) contributed to the slowdown during the month. On the other hand, financial conditions improved in Colombia (exchange rate appreciation and rising stock market). Brazil had an slight improvement during the month, as the commodity component advanced, despite declines in some financial variables.

Brazilian market conditions slightly increased at the end of December vis-à-vis the end of November. The Itaú Unibanco Market Conditions Index (IU-MCI)[1] climbed to 0.23 from 0.15, led by the improvement in commodity components (particularly corn, wheat and cotton, as well as rising aluminum prices). However, some financial variables deteriorated, despite a positive contribution from the stock market. The three-month moving average fell to 0.56 in December from 0.92.

Breaking down the IU-MCI, the Brazilian financial variables subcomponent dropped to 0.24 from 0.54 in the previous month. Hence, the three-month moving average declined to 1.14 from 1.54 in November.

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, despite the slowdown at the margin.

The commodity prices subcomponent ends December at 0.19, climbing from a near-neutral level in the previous month. Still, the three-month moving average fell to 0.21 from 0.49 in November.

 

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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