Strong US Treasury Yields Weaken Brazilian Market

Latin American and Brazilian stocks in particular tumbled, as a recent sharp increase in U.S. Treasury yields prompted investors to reassess their emerging market equity holdings. Argentine shares were further pressured by profit taking.

Brazil’s Bovespa Index plunged 931.40 points, or 2.43%. Mexico’s benchmark Bolsa Index dropped 440.39 points, or 2.32%, while Argentina’s Merval Index fell 39.32 points, or 2.17%.

Brazilian stocks sank, as a surge in U.S. 10-year Treasury yields yesterday fueled concerns the U.S. Federal Reserve may pick up the pace of its monetary tightening or extend its tightening cycle longer than expected to contain inflation.

The recent rise in U.S. treasury yields has been widely seen as reflecting expectations of further interest-rate hikes. Higher U.S. rates tend to divert investment flows away from emerging markets like Brazil.

Meanwhile, the local interest-rate outlook remained more favorable, with investors widely expecting Brazil’s central bank to cut its reference Selic interest rate by at least three-quarters of a percentage point from a current 17.25% after a two-day meeting that started this Tuesday, March 7.

Moreover, recent indications that inflation remains under control have fueled expectations the bank will extend its cutting campaign at future meetings. The bank started its easing cycle in September 2005.

In another sign of tame inflation, the Getúlio Vargas Foundation said its IGP-DI inflation index fell 0.06% in February compared with a jump of 0.72% in January.

In other economic data, industrial activity in São Paulo state rose a seasonally adjusted 1.5% in January from December, the São Paulo Federation of Industries (Fiesp), reported.

On the corporate front, mining giant Companhia Vale do Rio Doce (CVRD) said its fourth-quarter net profit leapt 66% to US$ 1.196 billion from US$ 721 million a year earlier. Revenue surged 54% to US$ 3.746 billion from $ 2.428 billion.

Despite the strong results, the company noted cost pressures related to the real’s strengthening against the U.S. dollar. "The appreciation of the real has affected costs. CVRD’s revenues are in dollars, but our costs are in reais. It will be an enormous challenge in 2006 to contain costs," said the company’s president Roger Agnelli.

Meanwhile, an influential investment bank raised its ADR price targets for four of Brazil’s biggest banks – Bradesco SA, Banco Itaú SA, Unibanco and Banco do Brasil SA – due to the revision of its foreign exchange forecasts.

In political news, Brazilian Finance Minister Antonio Palocci will continue in his post and will not coordinate President Luiz Inácio Lula da Silva’s reelection campaign, Workers’ Party National Chairman Ricardo Berzoini told reporters.

"Palocci is fundamental for the economy and there is no reason for him to leave his current post to coordinate the electoral campaign," he said.

Mexican shares plunged today, as rising U.S. Treasury yields resulted in investors selling off shares in emerging markets.  Meanwhile, U.S. fourth- quarter productivity was revised to show a decline of 0.5%, versus the initial drop of 0.6%. In the third quarter, productivity had jumped 4.2%. Analysts had predicted a decline of 0.2% for the fourth period.

In corporate reports, Colombian state-controlled firm Colombia Telecomunicaciones SA said that Telmex may bid for control of the firm, as it purchased bidding forms to participate in its auction.

Elsewhere, a major investment bank raised its price target for America Movil, as it believes the wireless titan’s valuation is compelling, and its stock price does not reflect possible margin expansion this year and next.

Cemex SA announced a second plant expansion in North America in less than a month. The cement titan will invest US$ 210 million to add 1.8 million metric tons to the 1.35 million tons of capacity at its Yaqui plant.

Argentina turned notably lower, following more modest declines on Monday, March 6. Profit-taking is the main culprit, after the main Merval Index surged last week, hitting two consecutive record highs in peso terms.

Transener edged higher, after the firm completed the sale of more than eight million Class C shares yesterday, with no subscribers. The shares will now be converted to Class B shares and will likely be passed to creditors.

Thomson Financial – www.thomsonfinancial.com

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