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US Inflation Brings Brazilian Stocks Tumbling Down

Brazilian stocks plummeted, in line with the U.S. market, as investors reacted to disappointing U.S. core consumer price data for April.

Brazil’s Bovespa Index dropped 1125.76 points, or 2.86%. Mexico’s benchmark Bolsa Index fell 589.20 points, or 2.83%, while Argentina’s Merval Index lost 60.20 points, or 3.45%.

Brazilian stocks tumbled, as a bigger-than-expected rise in U.S. core consumer prices fueled concerns that the U.S. Federal Reserve may continue its tightening cycle longer than anticipated in order to contain inflation.

The U.S. consumer price index rose an in-line 0.6% in April on a 3.9% increase in energy prices. However, the core CPI, which excludes food and energy, climbed 0.3% for the second month in a row, topping expectations for a 0.2% rise.

The data added to concerns that U.S. interest rates will continue to rise, potentially diverting investment flows away from emerging markets like Brazil.

Also weighing on investor sentiment, Brazilian retail sales volume dropped a seasonally adjusted 0.10% in March from February, the Brazilian Census Bureau reported.

Retail sales gained 3.01% in March from a year earlier. That was slower than February’s year-on-year growth of 5.74%. However, the year-on- year figures were not seasonally adjusted.

On the corporate front, a bankruptcy judge decided yesterday that any future buyers of beleaguered airline Varig will not have to assume responsibility for its massive debt, potentially facilitating additional bids.

Meanwhile, mining giant CVRD said that it reached an agreement for 2006 iron ore price contracts with Japanese steelmakers. The steel producers agreed to a 19% hike for iron ore fines, while iron ore pellet prices will decline 3.0%. CVRD reached a similar accord with Germany’s ThyssenKrupp AG late Monday, May 15.

Elsewhere, Mexican shares sank on heightened fears of rising U.S. interest rates following the release of disappointing U.S. inflation data.

Local economic data was more upbeat, however, suggesting the Mexican economy remains on solid footing.  The Finance Ministry said that Mexico’s gross domestic product rose 5.5% in the first quarter from the year- ago quarter, and climbed 1.54% from the fourth quarter of 2005 in seasonally adjusted terms. Economic growth was helped by a recovery in the industrial sector and a late Easter holiday.

Argentine issues plunged, in line with other Latin American markets, with steel and bank shares posting some of the biggest losses.

In economic news, the Argentine government posted a primary fiscal surplus for April of 1.534 billion pesos and an accumulated surplus of 6.442 billion pesos for the first quarter. Economists had expected a bigger April surplus of 1.725 billion pesos.

Meanwhile, Argentina’s industrial production jumped 7.7% in April from a year earlier and rose 0.3% from March. Both figures were seasonally adjusted.

Thomson Financial Corporate Group – www.thomsonfinancial.com

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