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Investors Worried Higher US Interest Rates Will Draw Money from Brazil

Brazil had a record high day and other Latin American stocks gained ground, as investors digested the U.S. Federal Reserve’s latest interest-rate decision.

Mexico’s market was supported by strength in mining shares, while upbeat trade data boosted Argentine equities.

Brazil’s Bovespa Index added 140.76 points, or 0.37%. Mexico’s benchmark Bolsa Index rose 57.86 points, or 0.31%, while Argentina’s Merval Index jumped 22.42 points, or 1.27%.

Brazilian stocks ended modestly higher, but enough to guarantee a second day record high, as investors assessed the outcome of the U.S. Federal Open Market Committee’s meeting today.

Trading was choppy after the Federal Reserve raised interest rates by 25 basis points and signaled that further rate hikes may be in the offing.

The FOMC said inflation was low and the outlook remained contained; however, it added that slack in the economy was disappearing, which could add to inflationary pressures.

In addition, it specified that further rate increases "may be needed," backing off a December statement that they would "likely" be needed. It also removed language that further rate hikes would be "measured."

Some investors are concerned that further U.S. rate hikes at a time when Brazilian rates are falling could divert funds away from Brazilian bonds and stocks into U.S. treasuries.

In local economic news, the São Paulo Federation of Industries, or Fiesp, said industrial activity in São Paulo state rose 1.8% in 2005 from the previous year. In December, industrial activity rose a seasonally adjusted 1.4% from November.

On the corporate front, paper and pulp giant Suzano Papel e Celulose reported a fourth-quarter net loss of 2.99 million reais, reversing a year- earlier net profit of 136.3 million reais. Results were hurt in part by continued appreciation of the real against the U.S. dollar in 2005.

The company noted that it remains concerned about the real’s strength. "At current foreign exchange rates, imports (of paper and pulp) into Brazil are viable, putting pressure on the domestic market," the company said.

Meanwhile, a brokerage raised its price target on Vale Do Rio Doce to US$ 55 from US$ 42.

Elsewhere, Mexico’s bolsa posted modest gains, helped by strength in mining issues, as gold and silver prices hit fresh multi-year highs. The National Statistics Institute said Mexico’s silver production rose 11.7% in November from a year earlier, while gold production jumped 75.2%.

In other data, the Finance Ministry estimated that the country’s economy expanded about 3% in the fourth quarter from a year earlier, as growth was limited by damage from Hurricanes Stan and Wilma on the agricultural sector. The Finance Ministry reiterated its full-year GDP forecast of 3.0%.

Separately, the Finance Ministry said late yesterday that Mexico ended 2005 with a fiscal deficit of 7.5 billion pesos, equivalent to 0.09% of gross domestic product, which is down from 0.25% of GDP in 2004.

In corporate news, a major investment bank upgraded Mexican mining company Grupo Mexico SA to "outperform" from "peer perform," saying the company is its "preferred way to invest in Latin American copper."

Argentine issues jumped, extending recent gains, as investors were cheered by upbeat trade data for December. In economic news, Argentina posted a trade surplus of US $1.033 billion in December, up from US$ 854 million a year earlier, on a 19% year-on-year increase in monthly exports. However, the full- year surplus narrowed to US$ 11.321 billion in 2005 from US$ 12.105 billion the prior year, despite improved exports.

Thomson Financial – www.thomsonfinancial.com

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  • Guest

    AS LONG AS…..
    Brazil pays 12/13 % above the inflation rate…. and even if this will be reduced to 10 %, there is no reason that foreigners will not continue to keep a small part of their money in Reais if they have confidence that the government will also repay the capital.

    At the end, it is a penatly that the government gives to itself and a gift for the lenders.

    But when they will feel that now is the time…..they will flee the Reais far more rapidly they bought it.
    Even local investors will switch to another currency very rapidly.

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