Brazilian Shares Rebound After Interest Rate Cut

Latin American shares ended higher today, June 1st, with Brazil and Mexico rallying to regain lost ground, despite weakness in commodity prices and worries about global interest rates.

Brazil’s Bovespa Index surged 1218.26 points, or 3.33%. Mexico’s benchmark Bolsa jumped 450.71 points, or 2.41%, while Argentina’s Merval Index gained 29.04, or 1.76%.

Following a half-percentage-point interest-rate cut Wednesday, May 31, to 15.25%, Brazil’s benchmark Ibovespa index rallied. The decision to cut the rate was unanimous, and in line with analysts’ expectations.

But traders remain worried about the hawkish minutes from the May 10 meeting of the U.S. Federal Reserve Board, which seemed to signal further rate hikes in the coming months.

Higher U.S. interest rates are what sparked a "flight to quality" in global markets last week, hurting asset prices in emerging markets like Brazil.

In Mexico, stocks ended higher amid a raft of mixed U.S. economic data. On an up note, growth in U.S. non-farm productivity in the first quarter was upwardly revised from the previous reading, while unit labor costs – a key gauge of inflationary pressures stemming from wages – were revised lower. However, the ISM index fell in May, signaling a deceleration in factory activity. Also, pending home sales fell in April.

Closer to home, economists surveyed by the Bank of Mexico in May lifted their economic growth estimate for 2006 to an average 4.04% from 3.92% a month earlier, the central bank reported.

The improved growth outlook followed the release last month of data showing a 5.5% growth rate for Mexico’s economy during the first quarter, its fastest pace since President Vicente Fox took office in December 2000. The strong showing prompted the government to predict GDP could rise more than 4.5% for the full year.

In other developments, a new rule went into effect that eliminates the double counting of the shares of firms whose holding companies also form part of the IPC Index. This means that wireless carrier American Movil will see its weighting on the IPC fall to about 15% from 19%, based on Wednesday’s closing prices, while that of its holding company, America Telecom, will be little changed at about 9%. Similarly, fixed-line phone company Telmex’s weighting will fall to about 5.7% from 7.2%.

Ixe brokerage said the changes will likely lead to more trading in those shares as index funds adjust their portfolios to reflect the new weightings.

Elsewhere, Argentine stocks extended their tentative recovery from a recent sell-off in emerging markets Thursday, but in an environment of continued caution that ensured trading volumes stayed low.

Thomson Financial – www.thomsonfinancial.com

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