LATIN AMERICAN MARKETS: Brazil Shares Up After Rate Cut, But Mexico Down

By Carla Mozee

Brazilian stocks edged higher Thursday following the central bank's cut of its key interest to its lowest level on record as policymakers work to spur growth in Latin America's largest economy.

But Brazilian equities moved off their highest level of the session and Mexico's benchmark lost grip of earlier gains as a rally on Wall Street fizzled. The S&P 500 Index (SPX) closed 0.1% lower and the Dow Jones Industrial Average (DJI) lost 0.2%.

Brazil's Bovespa rose just 0.1% to 47,289.53, but the advance was enough to keep the index at its strongest level since Oct. 1.

Shares of interest-rate sensitive banking stocks ended mostly lower, with Banco Bradesco (BBD) down 0.1%, federally run Banco do Brasil down 3.4%, and Nossa Caixa off 0.3%. But Itau Unibanco Multiplo (ITU) gained 1.1%.

Banco Central do Brasil said late Wednesday that after "assessing the macroeconomic scenario," it decided cut its key interest rate by 100 basis points to 10.25%, meeting market expectations. The Selic rate now stands at its lowest level since it was established in 1999 at 11.25%. The rate was cut by 150 basis points in March.

Brazil's currency shed 0.5% to 2.181 reals against the U.S. dollar. It climbed 1.2% on Wednesday ahead of the rate decision.

This was the third consecutive rate cut as policymakers tried to cushion the impact of the global credit and economic crisis on Brazil's economy.

The bank's "terse" statement "provided very little detail around their thinking," and policymakers' reasoning behind the rate decision will most likely be fleshed out in their notes from the meeting, Nick Chamie, head of emerging markets research at RBC Capital Markets, said in a telephone interview Thursday.

The notes are set for release on May 7.

"We believe they may start to hint that their moves are going to be more data-dependent ... and basically pointing to the direction that they have become less dovish around their rates view, all to say that they are probably approaching the end of their rate-cutting cycle."

Chamie foresees another cut of 50 basis points at their next meeting ending June 10, and then expects the bank to remain on hold.

The bank can afford to cut rates a little bit more, said Chamie. But he said a wait-and-see approach would be prudent, given that "the default rate has moved higher, lending has remained relatively reasonable, equity markets have improved, and that there are tentative sign that the rate of [economic] contraction seems to be slowing."

Steel stocks held to higher ground in Thursday's session, with Gerdau (GGB) up 2.6%, and Vale (RIO) higher by 1.3%. Most retailer saw their shares rise, with Lojas Renner up 7.5% and discounter Lojas Americanas up 2.4%.

But shares of market heavyweight Petrobras (PBR) fell 0.7%. The shares had climbed earlier in the session as the state-run oil giant said it plans to begin production at the Tupi subsalt oil field in the Santos Basin on Friday.

President Luiz Inacio da Silva is scheduled to attend a formal ceremony at the key Tupi field on Friday, and he may announce a plan to move toward creating a new exploration and production framework to be used for development of recently discovered deep sea reserves.

Specifics of any legislation sought by Lula may not be outlined at the ceremony, but the proposal, wrote Christopher Garman at risk-consultancy firm Eurasia Group, "is likely to be 'Petrobras-friendly' to the extent that the government wants some leeway to allocate strategic acreage to the company and is unlikely to include higher taxes on existing concessions."

Trading in Brazil, as well as in Mexico, Chile, and Argentina will be closed for the Labor Day holiday on Friday.

For the week, the Bovespa rose 1.1%, the IPSA shed 0.4% and the Merval gained 1.3%.

Mexico slips ahead of closures

In Mexico, advancers were led by stock exchange operator Bolsa Mexicana de Valores and cement maker Cemex (CX), up 3.1% and 2.7%, respectively.

But the IPC equity index lost 0.8% to 21,898.85.

America Movil's (AMX) share losses accelerated during the session, leaving them down 2.1%. The shares leaped 9.4% on Wednesday as the largest wireless services company in Latin America posted better-than-expected quarterly results.

But shares of Grupo Aeroportuario del Centro Norte, or OMA (OMAB), reversed losses to rise 1.4%. The company, which runs 13 international airports in Mexico, said late Wednesday that it has seen a reduction in passenger traffic as people have canceled or delayed their flights as a result of the swine flu outbreak.

For now, it can't estimate the impact the outbreak will have on passenger traffic volumes, the number of flight operations or on its financial condition.

"Much will depend on how long this situation continues and its impact on domestic and global economic activity," it said.

Operations have continued to run normally as OMA works with federal officials who are trying to limit the spread of the illness, the company said.

The swine flu is believed to have killed up to 176 people in Mexico. The government has ordered nonessential offices and many businesses to close between May 1 and May 5. The central bank has also warned that the swine flu could push the country into an even deeper recession.

The bank, as previously scheduled, presented its revised economic growth forecasts for 2009 on Wednesday, and now expects gross domestic product to contract between 3.8% and 4.8% this year. It expects the economy post growth rates of 1.5% to 2.5% in 2010.

Worries about the swine-flu outbreak and the toll it's taking on the already weakened Mexican economy helped push the IPC down 3% for the holiday-shortened week.

Monthly figures

But various reports throughout the month indicating the U.S. and Latin American economies may be on the road to recovery bolstered the region's equity markets in April.

The IPC finished the month up 11.6%, higher for the second consecutive month. April marked the best monthly performance for the benchmark since September 2005, when it leaped 13.2%.

The Bovespa jumped 15.5%, its best performance since February 2005 when it also rose 15.5%.

Chile's IPSA finished Thursday down 1.6%. But it logged a monthly rise of 7.7%, the strongest monthly gain since April 2007.

Argentina's Merval rose 0.4% Thursday. It closed April up 13.3%, its strongest advance since February 2005.

Among exchange-traded funds, the iShares MSCI Mexico Index Fund (EWW) jumped 14.3% in April, the iShares MSCI Brazil Index Fund (EWZ) surged 19.6%, and the iShares MSCI Chile Index Fund (ECH) rose 7.1%.