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Brazilian Market Finds Way Out of Red

Latin American markets endured a mixed session, as Brazil and Mexico moved in opposite directions. Brazilian receipts finally posted a mild recovery thanks to bargain hunters, after the market was entrenched in the red for most of the week.

Meanwhile, Mexican shares receded, following U.S. markets lower amid surging crude oil prices. Argentine shares edged higher, amid low volume.


Brazil’s benchmark Bovespa Index rebounded 101.33 points, or 0.41%, while Mexico’s benchmark Bolsa Index fell 90.38 points, or 0.67%. Argentina’s Merval Index rose 5.18 points, or 0.36%.


Brazilian issues finally moved into the black, following negative sentiment for most of the week.


Among the events that pressured Brazil’s Bovespa Index this week were ongoing political turmoil, record high oil prices and indications from the central bank that it will hold interest rates steady for several months rather than initiate some cuts as investors had hoped.


Separately, the federal treasury reported a May surplus of 3.1 billion reais, lifting the year-to-date surplus to 22.7 billion reais. Last month’s result was lower compared to the year-ago result, which totaled 3.73 billion reais, and April’s surplus of 12.9 billion reais.


In corporate reports, a major investment house lifted its earnings estimates for state-run oil firm Petrobras and maintained its “buy” recommendation on the stock. The firm raised its 2005 target by 8% to US$8.12 per ADR and by 6.6% to US$8.41 per ADR for 2006.


Separately, another large investment firm was bullish on cellular firm Telesp Celular. The firm believes that Telesp’s new chief executive and a possible consolidation in the sector are some of the positive events that could impact the firm.


Elsewhere, aircraft manufacturer Embraer announced that it has started to sell two new types of light aircraft in order to make further inroads into the corporate jet market.


Mexican stocks were a negative standout, as economists widely expected the Bank of Mexico’s decision to remove its link to the U.S. Federal Reserve. U.S. market weakness also pressured Mexico, as the U.S. is a key trading partner for the country.


Topping headlines, the central bank left monetary policy unchanged and decoupled its policy from the Fed. The move indicates an end to the central bank’s 16-month tightening cycle.


Still, the Bank of Mexico said in its statement that “internal monetary conditions shouldn’t be relaxed,” which signals that although rate hikes may not track U.S. increases, cuts to the domestic 9.75% level are also not in the cards.


In other key economic reports, the National Statistics Institute, or Inegi, reported that May unemployment declined to 3.3% from 3.7% in April. Nevertheless, underemployment, which incorporates employees that needed to work more than they ultimately did, rose to 7.9% last month from 7.4% in April.


In corporate news, conglomerate Alfa declined, after it announced yesterday that it intends to close a plant at Alpek, its petrochemicals unit, next month.


The firm said that high energy costs were partly to blame for the closure of the plant, which produces 55,000 tons of short polyester fiber a year and employs 150 people.


Argentine issues turned higher late in the session, although volume remained low. The Argentine Central Bank issued a new requirement for importers where pesos would be exchanged for U.S. dollars on the shipping date of the goods, thereby moving forward their U.S. dollar purchases. The central bank hopes to maintain a weaker peso, which is beneficial to Argentine exports.


Turning to corporate news, conglomerate SCP received approval from an Argentine appeals court for its debt restructuring offer. The decision will allow SCP to complete the sale of its energy unit, Compania General de Combustibles, to Southern Cross.


Thomson Financial Corporate Group – www.thomsonfinancial.com

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