Signs of Slower Pace of Interest Cuts Make Brazilian Stocks Tumble Down

Brazilian stocks headed lower together with Mexican shares that dropped on profit taking following a recent rally to record highs. Brazilian issues were also undermined by signs the Brazilian central bank may take a more conservative approach to monetary policy.

Brazil’s Bovespa Index fell 658.62 points, or 1.63%, while Mexico’s benchmark Bolsa Index dropped 176.29 points, or 0.86%, and Argentina’s Merval Index tumbled 50.49 points, or 2.63%.

Brazilian stocks sank, as investors cashed in some of the market’s recent strong gains and reacted to indications the Brazilian central bank may decelerate its monetary loosening cycle.

On the interest-rate front, minutes released today from the central bank’s April 19 meeting showed that bankers were considering slowing the pace of their current rate-cutting campaign.

"Given the uncertainties that surround the mechanisms of monetary policy and the smaller distance between the current base interest rate and the interest rates that should be in effect in equilibrium in the mid-term, the committee concludes that the preservation of important gains made in the combat of inflation and the maintenance of economic growth, with the generation of employment and an increase in real wages, should demand that additional easing of monetary policy be conducted with greater parsimony," the rate committee said.

The bank is now widely expected to cut the Selic base interest rate by 50 basis points at its next meeting in May, a smaller reduction than the 75 basis point cut taken in April. The bank has reduced interest rates at its last seven meetings to 15.75%.

On a more upbeat note, the Getúlio Vargas Foundation, FGV, said its General Price Index (IGP-M) fell 0.42% in April compared with a decline of 0.23% in March. The data added to recent signs that inflation is under control.

Meanwhile, industrial activity in São Paulo rose 1.1% in March from February, reported the São Paulo Federation of Industries.

In earnings news, telecom giant Telemar reported a first-quarter net profit of 144.5 million reais, down from 193.0 million reais a year ago, and well below market expectations of 233 million reais.

Long-distance telecom carrier Embratel, meanwhile, posted a nearly three- fold jump in first-quarter net profit to 127.9 million reais from 43.3 million reais a year earlier.

Also reporting, Telesp’s first-quarter net profit rose 20% from a year earlier, helped by higher tariffs and growth in its data service revenue.

Elsewhere, Mexican shares turned notably lower today, as profit taking finally hit the region following a string of record-high sessions. Investors mostly ignored comments from U.S. Federal Reserve Chairman Ben Bernanke regarding potential holds on U.S. interest-rake hikes; although, U.S. shares still enjoyed modest gains.

On the economic front, the National Statistics Institute, or Inegi, said that its global indicator of economic activity, or IGAE, rose 4.4% in February compared to a year ago. The most recent result was down 0.61% from January in non-annualized seasonally adjusted terms.

Turning to earnings, conglomerate Desc posted a first-quarter net loss of 79.2 million pesos, reversing a year-earlier profit of 280.9 million pesos. The firm’s operating profit slipped to 217.5 million pesos from 259.8 million pesos last year. Sales arrived at 5.8 billion pesos, down from last year’s 6.14 billion pesos.

Homebuilder Urbi surged on the day, thanks to its stock’s inclusion within a major investment bank’s model Latin American portfolio. That investment bank also raised Mexican stocks to "small overweight" from "underweight."

Argentina followed the broader region into the red, with the benchmark Merval index falling for the third-consecutive session.

In economic news, the national statistics agency, or Indec, said that the country’s trade surplus fell to US$ 814 million in March from US$ 852 million a year ago due to further growth in imports. On an accumulated basis, the trade surplus for the first quarter was US$ 2.356 billion, down from US$ 2.457 billion a year earlier.

A large investment house cut agricultural property owner Cresud to "Neutral 2" from "Buy 2."

Thomson Financial Corporate Group – www.thomsonfinancial.com

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