Fleeing Brazil Market to Higher Ground

Brazilian and Latin American issues fell, pressured by ongoing worries about rising U.S. interest rates and concerns about the impact higher oil prices will have on local inflation and global economic growth.

The Mexican market was closed for a public holiday, reducing some of the trading activity in the region. Brazil’s benchmark Bovespa Index fell 181.91 points, or 0.66%, while Argentina’s Merval Index tumbled 43.79 points, or 3.00%.


Brazilian stocks dropped again today, as investors continue to flee the market in favor of higher yielding developed market assets. With U.S. interest rates likely to rise again this week, many investors have begun pulling some of their money out of Brazil and other emerging markets in favor of less risky assets.


High oil prices continue to plague the market, as Brazil is a net importer of the commodity and the higher prices may continue to stoke inflationary pressures and force interest rates higher.


In this week’s survey of market opinion, analysts hiked their view for 2005 inflation to 5.8% from 5.77%, and also boosted their estimates for the year-end Selic rate to 17.13% from 17.0%. Currently, the key interest rate stands at 19.25%.


Turning to economic data, the central bank reported that Brazil’s current account surplus stood at US$ 11.7 billion over the 12 months ended February. For the month of February, the surplus was US$ 117 million, down from US$ 202 million a year ago.


Vale do Rio Doce was little changed ahead of its earnings report due after the close of trading today. The company is expected to post record earnings, but many analysts believe the strong results are already priced into the stock.


Profit-taking continued to plague Argentina, with the market suffering after its run-up in anticipation of a successful completion of the government’s US$ 103 billion debt restructuring. Many investors are now waiting for the government to address other economic and political issues before getting back in the market.


The Argentine Treasury announced plans to issue debt in the coming weeks to help pay down existing debt that comes due in 2005. Argentina’s last voluntary debt placement, debt unrelated to compensation measures stemming from its debt default, was in February 2001.


Turning to Mexico, although the market was closed, one broker said it expects Mexican equities to outperform their peers during 2005, especially during downturns. Additionally, the broker anticipates that pension funds, which were recently allowed to invest in equities, will likely buy on market corrections.


In other news, Standard & Poor’s issued a report saying that the expectations for Latin American banks are good, following their improved performance in 2004. Still, the group overall did not benefit from the report. Most regional banks fell, with Banco Itaú, Grupo Financier Galicia and Bancolombia ending down on the day.


Thomson Financial Corporate Group
www.thomsonfinancial.com


PRNewswire

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