Brazil Stocks Plunge on Concerns About US Inflation

Brazilian and other Latin American stocks retreated, in line with the U.S. market, as disappointing productivity and labor cost data fueled concerns about U.S. inflation. Shares were also pressured by profit taking following recent strong gains.

Brazil’s Bovespa Index tumbled 1180.65 points, or 3.07%. Mexico’s benchmark Bolsa Index slipped 102.00 points, or 0.53%, while Argentina’s Merval Index dropped 47.80 points, or 2.74%.

Brazilian stocks plunged, as investors locked in profits following the Bovespa’s record high close yesterday on continued optimism about the local economy’s prospects in 2006.

The bout of profit taking was sparked in part by heightened concerns that rising U.S. inflation could force the Federal Reserve to extend its monetary tightening cycle longer than expected.

Fueling inflation jitters, data released today showed that U.S. productivity slowed unexpectedly in the fourth quarter while labor costs rose.

To the extent price pressures lead to higher U.S. interest rates, some investors fear that funds will be diverted away from Brazilian bonds and stocks into U.S. treasuries.

In corporate news, an influential investment bank downgraded telecom firm Tim Participações to "peer perform" from "overperform," citing valuation.

"Given its impressive run in the last six months, we believe investors should take this opportunity to take profits and consider cheaper alternatives such as (Brazil’s largest mobile operator) Telesp Celular (TCP)," the bank said.

Petrobras said it expects the value of its exports of oil and oil products to exceed that of its imports by US$ 3 billion in 2006. In 2005, Petrobras was still a net importer of oil and oil products combined. The company anticipates becoming a net oil exporter this year, as several new offshore oil rigs are scheduled to go on stream.

Cable TV and Internet provider Net said its fourth-quarter net profit rose 21% from a year earlier to US$ 59.23 million, helped by organic growth in cable and broadband demand. Results also benefited from the approval of certain tax credits.

Shares Banco do Brasil were active amid speculation the government will sell part of its stake in the banking giant in a bid to list it on the Brazilian Stock Exchange’s Novo Mercado.

Elsewhere, Mexico’s bolsa slumped, in line with Wall Street, as disappointing U.S. productivity and cost data fueled concerns about higher inflation in the world’s biggest economy. Mexico’s economic health is tied closely to that of the U.S. since Mexico sends nearly 90% of its exports to its northern neighbor.

However, some upbeat analyst actions on local companies helped to limit the market’s losses. An investment bank raised its investment rating on financial group Banorte to "buy" from "neutral," citing attractive valuation and a solid earnings outlook. The bank also raised its price target on the shares.

Meanwhile, retailer Wal-Mart de Mexico’s share price target was boosted by another firm to US$ 68 from US$ 60. "We continue to believe that Walmex’s true advantage is its high sales productivity and, though hard to predict, we see positive indicators for 2006," the firm said.

Also, a major investment bank raised its price target for beverage company Femsa to US$ 88 from US$ 73, saying, "Valuation of the brewery is now more reasonable."

Argentine issues dropped for a second straight day as investors continued to cash in recent strong gains. The Merval hit a record high in peso terms on Tuesday. Shares were also pressured by investor caution ahead of tomorrow’s release of January inflation data.

Among individual shares, Petrobras Energia Participaciones fell after saying yesterday that it will take a charge of 420 million pesos on contracts related to Venezuela.

Thomson Financial – www.thomsonfinancial.com

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