Brazil Confident Foreigners Will Keep Their Money in the Country

Brazilian and Latin American stocks advanced, as investors continued to cheer signs the U.S. Federal Reserve may soon end its cycle of interest-rate increases.

Such a move would be especially beneficial for the region since higher U.S. interest rates tend to draw money away from emerging markets.

Brazilian shares were further boosted by optimism about the local economy, while inflation worries limited gains in Argentine issues.

Brazil’s Bovespa Index jumped 461.79 points, or 1.34%. Mexico’s benchmark Bolsa Index gained 168.54 points, or 0.91%, while Argentina’s Merval Index added 8.52 points, 0.53%.

Brazilian stocks extended yesterday’s stellar gains on continued expectations for solid economic fundamentals, tame inflation and further monetary policy loosening in 2006. Gross domestic product is expected to grow 3.5% to 4% in 2006.

On the monetary policy front, Brazil’s central bank is expected to cut the Selic base interest rate by at least 50 basis at its next meeting on January 18. The bank has reduced the rate, which now stands at 18%, at its last four meetings.

Adding to optimism about inflation, São Paulo’s Fipe research institute reported that 2005 consumer inflation in São Paulo rose 4.53% in 2005, the slowest pace since 2000 and much lower than the 6.57% increase in 2004.

In corporate news, Brazil’s largest private bank Banco Bradesco said late yesterday that it has assumed operational control of the state bank of Ceará. Bradesco bought BEC at an auction in December for 700 million reais.

Meanwhile, electric power utility Companhia Paranaense de Energia SA, or Copel, said Tuesday, January 3, that its board approved an investment program of 553.1 million reais for 2006, mainly in distribution and transmission.

In research, an influential investment bank started coverage of Brazil’s biggest bank, Banco do Brasil, at "buy" and a price target of 60 reais per share.

"We see 2006 as another good year for the sector, and believe Brazil’s largest bank is poised to benefit from strong retail credit growth and credit conditions," the investment bank said.

Elsewhere, Mexican shares added to yesterday’s strong gains, hitting another record closing high, as investors continued to cheer indications the U.S. Federal Reserve is nearing the end of its interest-rate hiking cycle.

Minutes of the U.S. Federal Open Market Committee’s December meeting on interest rates showed a majority of its members believe the central bank will only need to implement a few more rate hikes to contain inflation.

On the corporate front, property developer Desarrolladora Homex SA said that Mario Alberto Gonzalez Padilla will take over as chief financial officer starting January 30. He will replace interim CFO Roberto Carrillo Herrera.

Argentine issues gained ground, building on yesterday’s advance, on continued optimism about the U.S. interest rate outlook. However, gains were limited by continued worries about local inflation.

INDEC, the national statistics agency, reported today that Argentina’s consumer price index rose 1.1% in December from November, putting full-year inflation for 2005 at 12.3%.

That is twice the inflation rate in 2004. The central bank’s 2005 inflation target was 5% to 8%.

In other developments, the International Monetary Fund confirmed today that Argentina has completed early repayment of its entire outstanding debt to the Fund. The debt amounted to US$ 9.6 billion.

Thomson Financial – www.thomsonfinancial.com

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