LATIN AMERICAN MARKETS: Rate Concerns Cut Into Brazilian Stocks

By Carla Mozee

Brazilian stocks fell Monday, weighed down by worries that an interest-rate hike may be issued next week.

The Bovespa equity index fell 0.4% to 68,575, as utility, finance and home-building shares languished in the red.

Shares of market heavyweight Petrobras (PBR) lost grip of gains, moving down 0.3%, and iron ore giant Vale (RIO) and MMX Mineracao fell 0.3% and 2.2%, respectively, breaking away from the higher direction of other metals stocks including steel producer Gerdau (GGB) whose shares rose 0.7%.

Concerns about rates found renewed momentum from the latest weekly survey of economists conducted by Brazil's central bank. The survey showed that, on average, analysts now expect the benchmark inflation index, the IPCA, to end at 4.99% this year, up from a forecast of 4.91% last week.

The consensus estimate has climbed each week for the past seven weeks, and the latest reading keeps the inflation expectation above the government's target of 4.5% for 2010. Meanwhile, the economic growth estimate for 2010 remained unchanged at 5.5%.

Higher inflation would keep pressure on the central bank to lift interest rates to curb an overall increase in prices. Rate policy makers will meet next week.

The central bank's weekly survey also showed that economists expect the key Selic rate to end this year at 11.25%. The Selic is now at a historical low of 8.75%.

Shares of some interest-rate sensitive firms moved lower, with real estate developer Cyrela Brazil Realty down 2.2% to become the worst price performer of the session.

Shares of home builder Gafisa (GFA) lost 0.3% and Rossi Residencial declined 1.1% while Banco Bradesco (BBD) gave up 0.2%. Shares of credit-card transactions processor Redecard also fell, by 1.9%.

The Bovespa index is up about 0.4% since the start of the year, with gains in Friday's session modestly pushing the index out of negative territory for the year.

"The bull market in Brazil has lost some steam," wrote Citigroup strategist Geoffrey Dennis, who, in a note to a note to clients dated March 5, said the MSCI Brazil index had lost 8% from its high earlier this year. The index has also declined more than 3% since mid-October, said Citi, when the government imposed its IOF tax, or a tax on foreign fund inflows into securities.

"Local investor concerns over valuations versus fixed income (ahead of a new cycle of monetary tightening, which we expect to start at the March 17 [rate] meeting) and the October elections are now center-stage."

Brazil will hold its presidential election on Oct. 3, with President Lula's chief of staff Dilma Rousseff set to face Jose Serra, the governor of Sao Paulo.

"While much uncertainty remains over the details of the policy platforms of the two front-runners, we doubt that either will shift the overall policy stance significantly 'to the left,'" wrote Dennis. "There will be a time to take profits in Brazilian equities; we doubt we are there yet."

Citi backed its year-end target of 80,000 points for the Bovespa. The broker also reaffirmed its overweight rating on Mexico and its year-end target of 35,000 for the IPC index.

Mexico's IPC index closed 0.3% higher at 32,520.27.

Also in Brazil on Monday, the government issued a list of about 100 items from the U.S.-- including wheat, cars, electronic equipment and personal-hygiene products such as shampoo -- which will be subject to levies in 30 days.

Brazil plans to levy $591 million in tariffs on U.S. products following a ruling last year by the World Trade Organization, which found that Brazil would be allowed to impose sanctions against the U.S. because of unfair subsidies for cotton.

Chile's IPSA index reversed losses to finish up 0.3% at 3,798.82. The index finished last week with a loss of 1% in a volatile week as investors reacted to the financial and economic impact from the 8.8-magnitude earthquake that hit off the southern coast of Chile on Feb. 27.