Uncertainty Over New Finance Chief Drags Brazilian Market Down

Latin American stocks tumbled, with Brazilian shares posting the biggest losses, amid concerns about the outlook for U.S. interest rates and uncertainty over the direction of the new Brazilian finance minister’s economic policies.

Brazil’s Bovespa Index dropped 958.85 points, or 2.55%. Mexico’s benchmark Bolsa Index fell 296.34 points, or 1.54%, while Argentina’s Merval Index slipped 20.11 points, or 1.11%.

Brazilian stocks sank amid uncertainty about the future of the new Brazilian finance minister’s economic policies. After week’s of repeated corruption allegations, Antonio Palocci stepped down from his post as finance minister, and was replaced by Guido Mantega, former president of state-run Bank of National Development, or BNDES.

Deputy Murilo Portugal, one of the names circulated to replace Palocci, also resigned. The market may have been pressured by uncertainty over whether Mantega, who is viewed as a pro-growth advocate, will continue Palocci’s orthodox economic policies aimed at taming inflation. Mantega said in a news conference today that an acceleration of the central-bank’s current interest-rate cutting cycle "would not be a sin."

The Bovespa may have also been dragged under by somewhat hawkish comments from the U.S. Federal Reserve. The Fed raised U.S. interest rates by a quarter point to 4.75%, as widely expected, and left the door open for further rate increases.

The central bank noted that economic growth had rebounded strongly in the current quarter from the previous one, but that it appears likely to moderate to a more sustainable pace. Although the run-up in energy and other commodities prices has had only a modest effect on core inflation, possible increases in resource utilization may eventually add to inflation pressure.

As a result, the Fed believes "some further policy firming may be needed," a statement that disappointed some investors, who had hoped for signs the bank may soon end its rate tightening cycle.

In local economic news, Brazil’s government posted a primary budget surplus in February of 4.729 billion reais, up from January’s surplus of 3.07 billion reais.

Meanwhile, the Fipe research foundation said the São Paulo consumer price index rose 0.24% in the four weeks ended March 23, compared with a rise of 0.26% in the four weeks ended March 15, signaling a slight slowdown in the city’s consumer inflation.

On the corporate front, steel-maker CSN reported a fourth-quarter net profit of 352 million reais, down from 531 million reais a year earlier.

An influential investment bank started coverage of Braskem at "underperform," saying the company has "a solid management team and world- class disclosure and corporate governance standards" but that industry fundamentals will continue to deteriorate over the next few years.

Mexican shares moved lower on the day, alongside U.S. market declines, following indications from the U.S. Federal Reserve that further rate hikes are likely. Also dampening broader regional sentiment was the resignation of Brazilian Finance Minister Antonio Palocci.

In corporate reports, billionaire Carlos Slim and his family are transferring a 29% stake in Ideal, an infrastructure holding firm, to the Carso Foundation, which is affiliated with the Slim family.

Elsewhere, a major investment bank upgraded Coca-Cola Femsa SA to "buy" from "neutral," due to the bottler’s attractive demographics, potential synergies and "independent corporate governance."

A separate investment bank raised its rating on bank Grupo Financiero Banorte to "overweight" from "equal weight" due to valuation and "solid fundamentals for Mexican banks."

Grupo Mexico’s shares declined, as a strike at the firm’s La Caridad copper mine entered its fifth day. The National Mining and Metal Workers Union said that labor authorities are expected to end a dispute over union leadership soon.

Argentine issues followed the broader region lower amid U.S. interest rate hike concerns. Some profit-taking was also at hand, following yesterday’s boost from the successful debut of Banco Macro Bansud’s American Depositary Receipts, which in turn bolstered local shares.

Thomson Financial – www.thomsonfinancial.com

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