LATIN AMERICAN MARKETS: Chile Up After Rate Cut; Brazilian Market Upgraded

By Carla Mozee

Major Latin American markets climbed Friday, with Chilean stocks higher after the central bank delivered a larger interest-rate cut than had been expected, and Brazilian stocks gained following an upgrade of the market.

Regional equities also ended higher for the week, aided by gains on Wall Street Friday after the U.S. Labor Department reported a lower-than-expected amount of job loss in April. The S&P 500 Index (SPX) rose 2.4%.

Chile's IPSA rose 3% to 2,899.87, its fifth straight winning session and its strongest finish since late August.

Shares of Banco Santander Chile (SAN) rose 0.4%, Banco de Chile (BCH) gained 0.6% and market heavyweight and steelmaker CAP surged 5.2%.

Banco Central de Chile late Thursday cut its benchmark interest rate by a half point to 1.25%, above market expectations for a reduction of a quarter point. The rate now stands below a historical low of 1.75% that it hit in 2004. The rate reached its highest level late last year at 8.25%.

Attached to the policymaker's move was a less pessimistic outlook on this year's global economy, saying some recent data about global growth prospects "have tended to stabilize."

But the central bank also said that further rate cuts may be needed.

With the rate near 1%, "the central bank might start to use quantitative easing," if the economy remains in recession, said Alfredo Coutino, senior economist and director of Latin America research at Moody'sEconomy.com, in an note Friday.

"In this case, it would be possible to see the central bank buying bonds in order to inject fresh money and ease credit conditions."

In ETF trading, the iShares MSCI Chile Index (ECH) rose 2.3% on Friday and gained 8.8% for the week.

In economic news, the consumer price index for April rose 0.48% compared with 0.2% in March, in line with market expectations. Inflation on a yearly basis was 5.53%, down slightly from 5.61% in March.

Brazil advances; Citi ups Brazil equity rating

In Sao Paulo, Bovespa gained 2.6% to 51,395.99, bolstered by a 3.5% climb in shares of Petrobras (PBR) as crude-oil futures rose 3.4% to $58.63 a barrel.

Crude prices surged as optimism about a U.S. economic recovery were lifted after the government said U.S. nonfarm payrolls fell by 539,000 last month. Analysts had expected a decline of 600,000. The unemployment rate rose in line with expectations, to a 26-year high of 8.9%.

Brazilian equities also received an upgrade to overweight from neutral by Citigroup, and the year-end target for the index was raised to 60,000 points from 55,000. The broker noted that the index has climbed more than 29% and MSCI Brazil has gained nearly 36% since it cut its rating for the market in February.

Strategist Geoffrey Dennis said its view that regional equity markets "would see a short-term correction, or at best consolidation, has not proved correct, as yet," with the exception for a few days "in the face of the very strong global rally since early-March."

Citi, which had retained its long-term preference for Brazil, remains overweight in materials and has a newly overweight position in technology. It also cut utilities to underweight and telecoms to neutral.

"We would use any near-term correction as a chance to build new positions in Brazil," said Dennis.

On Friday, steel stocks advanced after taking a hit in the previous session. Mining giant Vale (RIO) fell 2.1%, Usiminas fell 4.9%, and Gerdau (GGB) rose 2.9%.

Also higher were shares of Vivo Participacoes (VIV), up 3.5%, after the mobile-services provider reported a 26% rise in first-quarter profit to 123.5 million reals ($58.56 million).

Brazil's currency also finished higher on Friday even after intervention by the central bank. It was the first time since September that the central bank has purchased dollars in a foreign-exchange auction. The real rose to 2.078 per U.S. dollar, compared with 2.108 in the previous session.

Win Thin, senior currency strategist at Brown Brothers Harriman, wrote Friday that the bank placed reverse currency swaps earlier this week to hedge against a weaker dollar, also for the first time since September.

"In past bouts of [Brazilian currency] strength, the central bank has used a combination of these two measures to lean against the wind. While unlikely to reverse [the real's] gains, the FX moves are meant to slow the gains as investor flows return to the riskier assets."

Elsewhere, Mexico's IPC rose 2.1% to 24,085.58, its first close above the 24,000-points level since early October.

Argentina's Merval surged 5% to 1,460.81, with a 14% jump in shares of Grupo Financiero Galicia (GGAL), a 6.2% rise in shares of oil firm Petrobras Energia (PZE) and a 3.9% gain in steel tube maker Tenaris (TS).

The regional indexes and country-related exchange-traded funds all finished higher for the week. Emerging-market equity funds in the week ended May 6 experienced huge inflows of $4 billion, Merrill Lynch said on Friday.

Brazil logged its second-largest weekly inflows on record, said Merrill, adding the pace of inflows into emerging-market funds have totaled $14 billion over the past seven weeks.

The Bovespa rose 8.7% for the week, its ninth consecutive week of advances. The last longest run of weekly gains was in late November 2005 through late January 2006.

The IPC gained 10% on a weekly basis. The IPSA rose 8.7% and the Merval jumped 18%.

The iShares MSCI Brazil Index Fund (EWZ) surged 9.2%, and the iShares MSCI Mexico Index Fund (EWW) climbed 14%.