LATIN AMERICAN MARKETS: Brazil, Mexico Stocks Fall Alongside U.S. Equities

By Carla Mozee

Mexican and Brazilian stocks remained in the red Wednesday after the U.S. Federal Reserve said it's seeing signs of economic recovery and, as expected, left interest rates unchanged.

Losses among Brazilian and Mexican equities deepened as Wall Street gave back its gains. Declines in the regional markets had eased shortly after the Fed said that economic activity has "picked up" with improved conditions in the financial markets.

The Federal Open Market Committee said it will keep rates near zero for an extended amount of time, and, as many expected, extended its purchase of mortgage-backed securities and agency debt into the first quarter of 2010.

"Since the Fed sees the economy strengthening, that should provide an extra boost to risk appetite, and that should play as positive back-up for Latin America if there's less concern about growth in the U.S. in the short-term," said Bertrand Delgado, a senior economist at RGE Monitor in New York.

However, "the risks for the medium-term still exist," he said.

The Fed in its statement repeated that it "continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

On Wall Street, U.S. stocks rose before they reversed course. The S&P 500 Index (SPX) fell 0.5%. The Dow Jones Industrial Average (DJI) also fell 0.5% to 9,782.

Brazil's Bovespa, which has hit a series of fresh highs for the year in recent sessions, was down 1.1% at 60,802. It closed Tuesday at its best level in more than 14 months following a decision by Moody's Investors Service to lift Brazil's debt rating to investment grade.

Communication and retail stocks weighed on the index in São Paulo, with shares of wireless services provider Tim Participacoes (TSU) down 3.5%, and department-stores operator Lojas Renner off by 3.2%. Market heavyweight and oil giant Petrobras (PBR) dropped 1.1% and miner Vale (RIO) shed 0.7%.

Losses accelerated in Mexico City, with the IPC down 1.7% at 29,000 and cruising toward its fourth consecutive loss. Shares of market heavyweight America Movil (AMX) stumbled 3.1% and Wal-Mart de Mexico (WMMVY) fell 3.4%.

RBC Capital earlier Wednesday said Standard & Poor's lead analyst covering Mexico "struck a negative-leaning tone late Tuesday, suggesting that President Calderon is likely to have difficulty persuading the opposition-PRI to support his fiscal and economic proposals."

S&P analyst Lisa Schineller was quoted as saying in an interview with Bloomberg News that administrations nearing the end of their terms "lose momentum."

Argentina's Merval on Wednesday slipped 2 points to 2,045.

But Chile's IPSA outperformed, rising 1%, with shares of Empresas CMPC up 9%. The pulp and paper producer signed a memorandum of agreement to purchase a unit of Brazil's Aracruz for about $1.43 billion. In São Paulo, shares of Aracruz (ARA) were last unchanged.

Making the grade

Brazil's currency continued to strengthen on Wednesday, trading at 1.784 reals per U.S. dollar from Tuesday's yearly high at 1.798 reals per dollar after Moody's upgrade of its ratings on Brazil's foreign- and local-currency government bonds to Baa3, or the agency's lowest level of investment grade. Moody's also said its outlook is positive.

Improvement in the government-debt structure was "an important contributing factor" to the upgrade, said Mauro Leos, Moody's regional credit officer for Latin America, in a statement.

Brazil's currency is up nearly 30% on a year-to-date basis, reflecting fundamental developments, noted Brown Brothers Harriman senior currency analyst Win Thin in a note to clients Wednesday.

The country is also likely to be upgraded again next year, wrote Thin.

"While the move brings Moody's into line with S&P's and Fitch's BBB- rating, the upgrade will open up an investor class that is prohibited from investing in split-rated investment grade countries," he said.

Along with Brazil, Chile and Mexico are the only countries in Latin America to have unified investment grades from the three ratings agencies, said Thin.

In ETF action, the iShares MSCI Brazil Index (EWZ) fell 1.6%, and the iShares MSCI Mexico Index Fund (EWW) lost 2.4%.