Brazilian Market Falls Erasing Earlier Gains

Latin American stocks dropped, as investors cashed in some of the region’s strong gains so far this year. Brazilian shares were further pressured by official data showing a smaller-than-expected decline in local consumer inflation.

Brazil’s Bovespa Index dropped 172.94 points, or 0.48%. Mexico’s benchmark Bolsa Index sank 235.43 points, or 1.23%, while Argentina’s Merval Index fell 11.58 points, 0.70%.

Brazilian stocks slumped, erasing earlier gains that pushed the Bovespa above 36,000 for the first time ever, as investors digested moderately disappointing inflation data.

The Brazilian Census Bureau, or IBGE, reported that the IPCA inflation rate slowed to 5.69% in 2005 from 7.6% in 2004. However, the 2005 result was slightly above economists’ forecasts for an increase of 5.68%.

Still, it was the third straight year that consumer price inflation slowed down. Also, 2005 inflation was above the central bank’s 2005 target of 5.1% but well within its tolerance band allowing for a maximum inflation rate of 7%.

In December, the IPCA inflation rate slowed to 0.36% from 0.55% in November, but missed expectations for an increase of 0.33%. Given that inflation has continued to slow, some investors are still hopeful the central bank will continue its cycle of lowering interest rates. The bank is widely expected to cut rates by at least 50 basis points at its next meeting on January 18.

In other data, the São Paulo Federation of Industries, or Fiesp, said industrial employment in São Paulo state rose 2.4% in 2005 from the previous year.

On the corporate front, paper and pulp producer Aracruz reported a fourth-quarter net profit of 177.2 million reais, down 58% from 423.1 million reais a year earlier, due to ongoing costs from the incorporation of Veracel and appreciation of the real against the U.S. dollar.

Meanwhile, a major investment bank started coverage of petrochemical firm Braskem at "equal-weight." "It is an efficient, hungry consolidator with a good track record of extracting efficiencies from newly acquired targets," the bank said. However, it added, "We are neutral on Braskem as we await potential consolidation catalysts and improved operating momentum in 2006."

In other research, an influential investment bank raised its price targets for Brazil’s wireless carriers Tele Centro Oeste and Tele Leste Celular, but reduced its target for Telesp Celular, due to recent acquisitions.

Elsewhere, Mexican shares sank after the market hit its fifth record closing high of the year yesterday. In the news, Bank of Mexico Governor Guillermo Ortiz said that annual inflation would probably continue its recent rebound in the first months of the year amid volatile fruit and vegetable prices.

He added, however, that core prices should remain stable at about 3%. Previously released data showed that inflation hit a record low of 2.91% in November but returned to levels above the central bank’s 3% target in December.

In other developments, the U.S. Department of Commerce lowered tariffs on imports of grey Portland cement and clinker by Mexico’s Cemex SA to 42.26% from 54.97%.

Argentine issues dipped, as investors took a breather from a recent run-up. Argentine stocks have performed strongly so far this year, caught up in a regional rally, on expectations the U.S. monetary tightening cycle is close to ending.

Argentine issues had come under pressure in December amid mounting local inflation and dissatisfaction with the government’s efforts to contain it.

Yesterday, the government signed an agreement with cement makers to keep prices steady for 90 days. It was the first price agreement this year. The government is currently in negotiations with other sectors over similar agreements.

Thomson Financial – www.thomsonfinancial.com

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