Disappointed with the US Fed Investors Let Brazil Down

Latin American stocks slumped, with Brazilian and Mexican shares succumbing to selling pressure after the U.S. Federal Reserve raised interest rates and offered few clues about the timing of a potential pause in its tightening cycle.

Brazil’s Bovespa Index dropped 227.79 points, or 0.54%. Mexico’s benchmark Bolsa Index fell 41.86 points, or 0.19%, while Argentina’s Merval Index added 4.01 points, or 0.21%.

Brazilian stocks dropped on profit taking and disappointment among some investors that the U.S. Federal Reserve’s monetary policy statement did not signal a likely pause in the current tightening cycle at future meetings.

The Fed raised this Wednesday, May 10, its key short-term interest rate by 25 basis points to 5% as expected, marking its 16th straight rate hike.

In its accompanying statement, the Fed said further hikes may be needed to address inflation risks but that the timing of such tightening would be data dependant. Some investors had hoped the Fed would indicate a near-term pause in its tightening campaign.

On an up note, local economic data showed a drop in Brazilian inflation, fueling expectations for a continued decline in domestic interest rates.

The IBGE reported that inflation as measured by the official IPCA consumer price index tumbled to 0.21% in April from 0.43% in March.

The IPCA rate for the 12 months ended in April dropped to 4.63% from 5.32% for the 12 months ended in March, marking the lowest 12-month rate since July of 1999.

In corporate news, steelmaker Companhia Siderúrgica Nacional (CSN) reported a first-quarter net profit of 340 million reais, down 53% from a year ago, as net revenue dropped 32% to 1.95 billion reais.

Also reporting, electric power utility Companhia Energética de São Paulo (CESP) posted a first-quarter net profit of 78.2 million reais, up sharply from a year-earlier net loss 162.1 million reais.

Meanwhile, a major investment bank started coverage of supermarket chain Companhia Brasileira de Distribuição (CBD) with an "overweight" rating, citing improving same-store sales and strengthened management.

In other analyst actions, another major investment bank downgraded steel producer Gerdau to "neutral" from "buy," citing a weak outlook for domestic demand.

Elsewhere, Mexican shares were also dragged under by profit taking and continued uncertainty about the U.S. interest-rate outlook.

Bucking the downtrend, however, shares of Wal-Mart de Mexico climbed after the retail giant reported a 9.9% jump in April same-store sales from a year earlier, helped by a late Easter holiday. Total sales rose 20.7% from April 2005 to 14.97 billion pesos.

Argentine issues edged up, as investors digested some fresh earnings news. Textile manufacturer Alpargatas reported a first-quarter net profit of 7.04 million pesos, while power generator Centro Puerto posted a first-quarter net loss of 107.2 million pesos. Neither company provided comparison figures for the year-earlier quarter.

Thomson Financial – www.thomsonfinancial.com

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