Inflation Fears Bring In the Bears in Brazil

Brazilian and Latin American equities declined, as fears regarding inflation and interest rates weighed on the region’s stocks. Additionally, global commodity prices came under pressure alongside strength in the U.S. dollar.

Brazil’s benchmark Bovespa Index dropped 444.56 points, or 1.66%, while Mexico’ s benchmark Bolsa Index ebbed 23.90 points, or 0.19%. Argentina’s Merval Index tumbled 16.29 points, or 1.19%.

Brazilian issues declined, amid fresh concerns regarding inflation, as investors also remained distracted by increasing U.S. Treasury yields.

In the latest weekly survey, analysts polled by Brazil’s central bank boosted their outlook for 2005 inflation to 5.83% from 5.80% last week. Also, estimates for the year-end Selic base interest rate were raised to 17.5% from 17.13% last week.

Economists commented that the inflation fears are related to higher consumer spending as well as the increasing costs of commodities and raw materials.

They noted that the central bank’s recent policy of hiking interest rates can help limit consumer spending but can do little to contain advancing iron ore, coffee and soybean prices.

Also, Brazil’s Finance Minister, Antonio Palocci, said via a written statement that the government will not renew the country’s standby credit accord with the International Monetary Fund.

He added that the government’s decision has already been communicated to the IMF. The existing accord dates from 2003 and includes credits of over US$ 14 billion.

Turning to corporate news, Brazilian electric power utility Copel posted a fourth-quarter net profit 76.43 million reais, versus a loss of 89.2 million reais one year prior. Also, net revenues leapt 70% to 1.19 billion reais. Copel did not supply an explanation for the quarterly results.

One influential brokerage said it will maintain an “outperform” rating on the company’s shares, as political risks on tariff controls have already been priced in, while another major analyst said its “neutral” stance will remain in place as “investor concerns over political risks will limit the stock’s valuation.”

Low-cost airline Gol Linhas Aereas Inteligentes SA said it has filed papers with government authorities in both Brazil and the U.S. associated with a proposed offering of preferred shares in both markets.

Elsewhere, Mexican stocks slipped in slow trading, following an early advance. Traders noted that there was a “lack of conviction” among investors, partially due to rising interest rates.

In economic news, Mexico’s National Statistics Institute, or INEGI, said the global indicator of economic activity rose 4% in January from the corresponding month in 2004, and rose 0.19% from December in seasonally adjusted terms.

Copper mining firm Grupo Mexico’s B shares fell. More than 90% of the shareholders of the company’s Peruvian unit, Southern Peru Copper Corp., voted in favor of the planned merger of SPCC and Grupo Mexico’s Mexican mining division Minera Mexico. The merger, effective April 1, will bolster Grupo Mexico’s share of SPCC to 75% from 54%.

Meanwhile, Argentine stocks fell again, extending their losing run for a fourth day as a fresh lawsuit over the country’s massive debt swap deepened investors’ negativity.

Investors weighed reports that a U.S. district court last week froze US$ 7 billion in defaulted bonds involved in the country’s US$ 103 billion debt restructuring program. The plaintiff in the case is Cayman Islands-based NML Capital.

Though Argentine Foreign Minister Rafael Bielsa said over the weekend that the court’s decision was a mistake, the legal jam could delay the delivery of new bonds under the restructuring.

Additionally, sentiment was negatively impacted by a local media report quoting an Economy Ministry official who stated inflation in Argentina may exceed the official 7.9% target.

Thomson Financial Corporate Group



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