Brazil Stocks Sink Deep on Interest Rate Concerns

Latin America were heavily pressured by Brazilian losses, as investors returned yesterday’s gains and then some. Mexico and Argentina were also solidly lower.

Domestic investors also eyed a fresh U.S. economic reading that indicates rising inflation, which could lead to an extended rate tightening cycle in the U.S. Higher rates tend to draw money out of emerging markets.

Brazil’s Bovespa Index plunged 1173.70 points, or 3.88%. Mexico’s benchmark Bolsa Index tumbled 197.89 points, or 1.29%, while Argentina’s Merval Index negated 23.71 points, or 1.47%.

Profit-taking and U.S. and local interest rate concerns sent Brazilian stocks deep into the red. Investors continue to await the central bank’s interest rate meeting tomorrow, in which the current 19.5% rate is expected to be cut by up to 50 basis points.

Meanwhile, in the U.S., the Producer Price Index surged 1.9% on a seasonally adjusted basis last month, following a 0.6% increase in August. Also, the core PPI rose 0.3%, following an unchanged reading the prior month.

In corporate news, Brazil’s Petrobras and Portugal’s Petrogal won four joint exploration blocks in the northeastern Sergipe and Alagoas offshore Basin. Yesterday, Petrobras acquired 31 oil and natural gas blocks from the Brazilian government’s auction of oil and gas exploration blocks.

Meanwhile, a major investment bank upgraded InBev to "outperform" from "neutral," while lifting its price target. The brokerage credited strength in the Brazilian real and the firm’s current cost savings program for the upbeat research note.

Turning to the airline sector, according to local newspapers, the government is putting together a plan to help Varig with its debt load. The government may provide money to the firm through the Brazilian National Development Bank and then launch a share offer in Varig’s cargo, logistics and maintenance units.

In utilities, Brazil’s National Power Authority, or Aneel, approved a rate reduction for Bandeirante Energia. Aneel reduced the electric power company’s rates by an average 8.86% starting October 23.

Mexico returned some of the gain incurred during yesterday’s session. Investors seemed to focus more on U.S. inflation concerns, rather than local corporate reports.

In earnings headlines, broadcaster TV Azteca said that its third-quarter net profit fell 5% to 403.8 million pesos from a year ago, while operating profit declined to 772.4 million pesos from 881.1 million pesos. Sales fell to 2.10 billion pesos from 2.29 billion pesos.

Construction firm ICA announced last night that it received a 20-year highway modernization and maintenance contract in central Guanajuato state.

Airline holding firm Cintra was under heavy selling pressure ahead of the privatization of its carriers AeroMexico and Mexicana. Some analysts are concerned that the carriers are overvalued at current levels.

Meanwhile, state oil firm Pemex intends to issue 10 billion pesos in debt this week in two tranches. The firm is set to offer 5 billion pesos in notes due 2011 and 5 billion pesos in notes due 2015.

Argentine issues turned lower amid light trading volumes. Many investors are keeping to the sidelines ahead of this weekend’s congressional elections.

On the economic front, INDEC reported that industrial production rose 1.2% on a seasonally adjusted basis in September from the prior month and rose 8.6% from a year ago. Also, capacity utilization rose to 75.1% from 73.1%.

Thomson Financial Corporate Group – www.thomsonfinancial.com

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