Expected Lower Interest Rates in Brazil Weaken Financial Firms

Latin American markets moved lower, led by declines in Brazil, as profit-taking continued. Mexican issues witnessed more modest declines, while investors await an expected rate cut tomorrow.

Meanwhile, Argentina’s market was closed for a holiday. Also, U.S. stocks closed lower Thursday, partly due to worries about weak energy supplies and unusually cold winter weather. Crude oil prices strongly advanced on the day.

Brazil’s benchmark Bovespa Index fell 276.75 points, or 0.84%, while Mexico’s benchmark Bolsa Index slipped 33.17 points, or 0.19%.

Brazilian issues tumbled on the day, after posting gains earlier in the session. Profit-taking and U.S. market weakness contributed to the day’s decline. Financial firms were particularly weak, as investors anticipate another Brazilian interest-rate cut mid-month.

Yesterday, the president of Chinese operations of CVRD rival BHP Billiton said that CVRD is expected to lead price negotiations for ore prices in 2006.

Meanwhile, CVRD’s chief financial officer commented that iron ore will continue to be in high demand for the foreseeable future due to growth in China, which has left a global market imbalance.

Separately, aircraft manufacturer Embraer moved lower on the day, despite upbeat news. Colombia’s Defense Minister officially announced the purchase of 25 of Embraer’s Super Tucano jets for US$ 234 million. Embraer rose on the session.

Mexican shares also faltered, as investors await an expected cut in the overnight rate to 8.5% from 8.75% from the Bank of Mexico. Separately, Fitch upgraded Mexico’s credit rating to one notch above its lowest investment grade.

In major economic reports, the Bank of Mexico reported that the Consumer Price Index rose 0.72% in November, below analyst expectations. Mexico’s annual inflation rate declined to a record low last month, further supporting speculation that the central bank will cut rates tomorrow.

Wireless phone firm America Movil declined on the session. A major investment bank commented that its valuation of the firm is "very much dependent on prevalent interest rates." The brokerage believes that lowered interest rates, country-risk premiums in Latin America, and good operating performance is what’s driving the "stock’s surge."

Turning to financial corporate reports, a brokerage house downgraded Banorte SA to "hold" from "buy," as falling interest rates and expansion costs may hurt earnings growth. Banorte shares receded.

Thomson Financial Corporate Group – www.thomsonfinancial.com

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