Fear of Higher Interest Rates Brings Brazilian Market Tumbling Down

Latin American stocks tumbled, as investors took profits and reacted to gloomy analyst commentary on emerging markets. Brazilian shares were further pressured by renewed worries about the outlook for local interest rates.

Brazil’s Bovespa Index tumbled 759.50 points, or 2.04%. Mexico’s benchmark Bolsa Index dropped 197.12 points, or 1.05%, while Argentina’s Merval Index fell 30.74 points, or 1.78%.

Brazilian stocks sank, as investors cashed in some of the Bovespa’s robust January gains, while also fretting over the implications of today’s strong industrial output data for Brazilian interest rates.

Fueling concerns about the direction of monetary policy, the IBGE government census bureau reported today that Brazilian industrial output surged 2.3% in December from November levels, suggesting the economy is gaining steam.

Output grew 1% in the fourth quarter from the previous quarter and gained 3.1% in 2005. Some investors are concerned that signs the economy may be overheating could force the central bank to slowdown or even halt its recent interest-rate cutting campaign.

The bank has lowered rates to 17.25% from a peak of 19.75% at its last five meetings.

Shares were also pressured by downbeat analyst research on emerging markets. An influential investment bank downgraded emerging market equities to "neutral" from "overweight" on relative value and started U.S. equities at "overweight."

The bank said flows are close to the point of pushing emerging markets and Japan "beyond fair value, creating relative value opportunity in the U.S."

In corporate news, Petrobras inaugurated two heavy oil projects and a gas treatment plant in the north of Espí­rito Santo state, which had a combined construction cost of US$ 288 million.

Meanwhile, steelmaker Usinas Siderúrgicas de Minas said it inked a deal with local heavy construction firm Camargo Correa to build a $100 million power plant.

A major investment bank raised its target for the American Depositary Receipts of mining giant Companhia Vale do Rio Doce (CVRD) to US$ 66 per ADR from US$ 60. The bank also hiked its forecast for growth in iron ore prices to 18% in 2006 price contracts from a previous estimate of 10%.

Mexican shares continued to decline today, led by the telecom sector. Investors are awaiting the quarterly financial release from America Movil later today.

Meanwhile, a large investment bank reduced its recommendation on Mexican shares to "underweight" from "market weight," partly due to high valuations and a lack of industrial growth and job creation in the country.

Within the financial sector, a major investment bank added banking firm Banorte to its model portfolio, sending the firm’s shares higher on the day.

Coca-Cola bottler Arca announced expectations for higher fourth-quarter sales and profits compared to the year-earlier period. Actual results will be released on February 21.

In deal reports, chemical firm Mexichem SA is set to buy U.S.-based Bayshore Group, a maker of polyvynil chloride, for an undisclosed amount. Specifically, the Mexican firm will buy Bayshore Vinyl Compounds Inc., Bayshore Rigids LLC and Ricicla SA.

Argentina moved lower, as profit-taking continued following strong gains in January. Trading volume was also notably lower. Amid few corporate news items, Argentine pilots and mechanics unions said they will put aside a planned strike for now, after they received a verbal proposal from Aerolineas Argentinas that somewhat appeased their job security concerns.

Thomson Financial – www.thomsonfinancial.com

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