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Brazil Cuts Interest Rates and Market Comes Tumbling Down

Latin America turned sharply lower across the region, alongside U.S. market weakness. Some analysts indicated that hedge fund and foreign investment fund selling in Brazil, following a 50 basis point cut to interest rates in the country, was behind the notable declines.

Meanwhile, Brazil was not alone in pressuring the region, as Mexico and Argentina also tumbled. Brazil’s Bovespa Index plunged 953.03 points, or 3.25%. Mexico’s benchmark Bolsa Index tumbled 290.85 points, or 1.92%, while Argentina’s Merval Index receded 28.90 points, or 1.80%.

In the headlines, Brazil’s Central Bank cut the Selic base interest rate by 50 basis points to 19.0%. In other economic reports, the Getúlio Vargas Foundation said its Brazilian General Price index, or IGP-M, advanced 0.61% through October 20, compared to a decline in prices of 0.54% in the corresponding period last month.

Meanwhile, the IPCA consumer price index rose 0.35% in September, compared to a 0.17% advance in August. The most recent result brought inflation year-to-date to 3.94%, which is below the official 2005 target of 5.1%.

Meanwhile, paper and pulp producer Suzano said that its board authorized the firm’s plans to construct a new US$ 1.3 billion cellulose unit at its Mucuri plant in the northeastern state of Bahia.

The plant is scheduled to start production by the end of 2007 with an initial production capacity of 120,000 tons of cellulose that is anticipated to rise to 1 million tons of cellulose by 2009.

Mexican shares weakened alongside the demise in U.S. shares. U.S. leading indicators disappointed last month, which is not a healthy indicator for Mexico, as the country exports the vast bulk of its goods to its northern neighbor.

In U.S. economic reports, the Philly Fed index showed a rebound in manufacturing activity in the Philadelphia region in October, but also a rise in inflationary pressures. The prices received index, a component of the survey, shot up to 36.2 from 8.6, the highest level in a year.

Also, a gauge of future U.S. economic activity declined in September for the third month in a row, indicating slower growth for the rest of the year, the Conference Board said. Its index of leading economic indicators fell 0.7% in September, as the impact of the hurricanes in the Gulf began to be filter through.

On the earnings front, conglomerate Alfa SA said that asset sales and better operating performance within continuing operations helped boost the firm’s third-quarter net profit to 3.76 billion pesos from 1.14 billion pesos a year earlier.

Sales leapt to 17.4 billion pesos from 15.19 billion pesos, while operating profit was 1.69 billion pesos, compared to 1.39 billion pesos.

Elsewhere, Desc posted a third-quarter net loss of 14.1 million pesos, reversing a year-earlier net profit of 53.7 million pesos, as its sales declined to 5.85 billion pesos from 6.38 billion pesos. Nevertheless, operating profit rose 6.4% to 308 million pesos from 289 million pesos last year.

Meanwhile, Argentine stocks receded alongside the broader market. Investors remain cautious ahead of Sunday’s congressional elections.

In economic headlines, national statistics agency INDEC said that gross domestic product increased 8.9% on the year in August, while edging up 0.9% from July. For the eight months through August, growth was up 8.9%.

Thomson Financial Corporate Group – www.thomsonfinancial.com

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