Brazil Fears High Interest Rates Only Won’t Halt Inflation

Latin American markets were mixed to higher today, as Mexico and Argentina benefited from strength in the U.S. Brazil was down, despite expectations that both foreign and domestic investors will begin to move back into the market after sharp declines in March and April. A late-day rally in crude oil prices kept pressure on the market.

Brazil’s benchmark Bovespa Index shed 139.10 points, or 0.56%, while Mexico’s benchmark Bolsa Index advanced 101.96 points, or 0.83%. Argentina’s Merval Index rallied 30.41 points, or 2.26%.


Brazilian shares weakened, despite gains on Wall Street, as inflation worries stemming from a jump in oil prices weighed on the market. Additionally, traders indicated that both domestic and foreign investors were beginning to move back into the market cautiously after April’s declines.


Many foreign and domestic investors have been sidelined over the past two months amid worries about rising Brazilian and U.S. interest rates.


Meanwhile, a survey released by the central bank indicates that inflation expectations are rising, marking the ninth consecutive weekly increase.


There are worries that high Brazilian interest rates will not be enough to stem the tide of rising inflation. Still, expectations remain that the key Selic rate will end the year at 17.75%, down from the current 19.50%.


In other economic news, Brazil posted a US$ 3.876 billion trade surplus in April, with exports totaling US$ 9.202 billion. Results were in line with analyst predictions for the period.


Economists anticipate a stable trade surplus this year as a rise in the real is offset by a gradually improving structural base for local exports.


Turning to earnings reports, telecom giant Telemar said that its first-quarter net profits fell to 193 million reais, missing analyst expectations, amid higher financial and tax costs. Revenues in its core local phone service were 2.98 billion reais, a 7.5% increase from the year prior.


Also, a major brokerage house issued bullish research on the Brazilian utilities, stating that the group is likely to report strong earnings over the course of the next two weeks. Positive demand trends and new power generation contracts were cited for the positive outlook.


Mexican stocks advanced, supported by strength in the U.S. equity market. Sentiment towards Mexican equities remains positive as the country just wrapped up a largely favorable first-quarter earnings reporting season.


Still, worries about the impact higher U.S. interest rates will have domestically are causing some uncertainty ahead of tomorrow’s U.S. Federal Reserve meeting. The Fed is expected to raise rates, which in turn will likely boost domestic interest rates.


On the local economic front, the Mexican government estimated that gross domestic product grew 3% in the first quarter, weighed down by the March Easter holiday. Economists expect the Mexican economy to grow by about 4% this year, down from last year’s 4.4% advance.


In corporate news, TV Azteca continued to trade actively, on news federal authorities plan to press charges against Chairman Ricardo Salinas Pliego and board member Pedro Padillo for wrongful use of privileged information over the 2003 debt deal involving Azteca and Unefon.


Out of Argentina, stocks posted strong gains, supported by the rise in the U.S. market. In economic news, retail sales fell 1.8% in April from a year-ago, the biggest average year-on-year decline for the past 12 months. The weaker performance was due in part to the timing of the Easter holiday. Additionally, the report suggested that inflationary pressures are dampening consumer confidence.


Thomson Financial Corporate Group
www.thomsonfinancial.com


PRNewswire

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