Market Betting Brazil Will Lower Key Interest Rates 2.5% to 14%

Latin American stocks were mixed, Monday, April 10, with Brazilian shares falling on concerns about the impact of rising oil prices on the outlook for inflation and interest rates. Meanwhile, Mexican shares rose on bargain hunting following a sharp drop on Friday.

Brazil’s Bovespa Index dropped 451.76 points, or 1.16%. Mexico’s benchmark Bolsa Index rose 75.99 points, or 0.39%, while Argentina’s Merval Index jumped 21.36 points, or 1.17%.

Brazilian stocks sank, as a jump in crude oil prices fueled concerns about inflationary pressure in the U.S. and the need for a continued rise in U.S. interest rates.

Higher U.S. interest rates tend to divert investment flows away from emerging markets like Brazil. Investors also fear that higher energy costs will stoke local inflationary pressures, inhibiting the Brazilian central bank’s move to lower interest rates.

Recent economic data has pointed to tame local inflation and led analysts to repeatedly lower their 2006 inflation and interest-rate outlooks.

According to the Brazilian central bank’s latest weekly market survey released Monday, analysts and economists reduced for the second consecutive time their forecasts for 2006 year-end inflation as measured by the official IPCA index.

They also cut their year-end 2006 forecast for the benchmark Selic base interest rate to 14% from 14.13% a week ago. The central bank has reduced the Selic rate at its past six meetings. The rate now stands at 16.5%.

In corporate news, miner CVRD denied Chinese reports that the company had reached a deal with Chinese steelmakers to raise iron ore prices by 10%. The denial was in response to reports made by China-based Web site MySteel.com that CVRD had inked a deal with Chinese steelmakers that called for the 10% price hike. CVRD President Roger Agnelli had confirmed last month the company was seeking a 24.6% increase to 2006 price contracts.

Oil giant Petrobras said Bolivian natural-gas supplies to Brazil will return to normal flows next week. Gas imports from Bolivia were cut last week after heavy rains damaged pipelines there and repair work was impeded by protests.

Meanwhile, a major investment bank upgraded Net Serviços to "overweight" from "underweight."

On the political front, a survey conducted by the DataFolha polling institute showed that if elections were held today, President Luiz Inácio Lula da Silva would beat the opposition Social Democratic Party candidate Geraldo Alckmin 40% to 20%.

The survey suggested that Lula’s reelection chances have not been seriously hurt by ongoing corruption allegations that have affected his administration. It was the first nationwide survey since former Finance Minister Antonio Palocci resigned.

Mexican stocks witnessed healthy gains, bouncing back from a steep fall last Friday that was spurred by a stronger-than-expected U.S. employment report, which raised interest-rate hike concerns. Also aiding Mexico was a rally in crude oil prices, which surged to a level near US$ 69 a barrel. Mexico is an exporter of oil.

In corporate reports, a major investment bank raised its price target on America Movil due to forecasts for a weakening Mexican peso and strengthening

Brazilian real. The brokerage is also optimistic for the firm’s subscriber growth forecasts.

Last Friday, retailer Wal-Mart de Mexico posted a first-quarter net profit of 2.43 billion pesos, compared with 1.92 billion pesos in the corresponding period a year ago. Operating profit leapt 29% to 3.13 billion pesos from last year’s 2.43 billion pesos. Sales advanced 12.9% from a year ago to 41.99 billion pesos, while same-store sales rose 3.8%. The retailer’s shares gained on the day.

Turning to the economy, the Finance Ministry said that the trade surplus in February was downwardly revised to US$ 405 million from US$ 461 million. The accumulated trade surplus for the first two months of the year stands at US$ 939 million.

Argentina also bounced back from downbeat trading last Friday, and posted solid gains today.

The country’s Mendoza province intends to put 13 oil and gas blocks up for auction upon the approval of the province’s new hydrocarbons law.

Thomson Financial – www.thomsonfinancial.com

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