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Brazil’s Decision to Repay IMF Early Leads Stocks to Record High

Hopes for an end to interest rate hikes in the U.S., as well as Brazil’s decision to pay down debt early, propelled regional markets higher, although Argentina’s Merval index continued to languish, amid economic concerns.

Brazil’s benchmark Bovespa Index jumped 449.05 points, or 1.36%, while Mexico’s benchmark Bolsa Index climbed 265.20 points, or 1.51%. Argentina’s Merval Index fell 6.47 points, or 0.43%.

Brazilian shares broke a new record today on a confluence of positive economic developments. At home, investors were hoping that the central bank would reduce interest rates again later this week.

Also, investors applauded news that Brazil’s government intends to pay down all of its US$ 15.5 billion in outstanding debt to the International Monetary Fund by the end of 2005. Initially, the debt was scheduled to be paid through the end of 2007.

In company developments, airline Varig was active on news that businessman Nelson Tanure has agreed to buy a 25% interest in the firm. Still in the sector, airline TAM and Air France strengthened their alliance to take advantage of their respective connecting hubs.

In research, a major investment bank started phone company Telesp at "overweight," viewing it as a "solid opportunity on cash flow generation and distribution." Separately, news reports stated that Spain’s Telefonica Moviles and Portugal Telecom may be considering cutting their investments at their Brazilian wireless operations in order to stem margin erosion.

Mexican issues, meanwhile, broke a new record as well, on strength in the U.S., and as investors continued to cheer a bigger-than-anticipated cut in interest rates last Friday. Markets were closed yesterday for a holiday.

Today, as expected, the U.S. Federal Reserve raised interest rates by 25 basis points to 4.25%. Yet, in addition, the central bank changed its usual wording in its rate outlook statement, raising investor hopes that the cycle of rate hikes may be over sooner rather than later.

In other U.S. data, November retail sales climbed 0.3%, slightly below targets of 0.5%. However, October sales, initially showing a decline of 0.1%, were revised higher to show a 0.3% increase.

Excluding autos, sales dropped 0.3%, following a 0.8% gain in October, and versus expectations for a flat reading. Separately, October business inventories advanced 0.3%, below the 0.5% gain registered the prior month and short of expectations for a 0.4% increase.

Argentine stocks ebbed lower, in light volume, as investors continued to be concerned about mounting inflation and uncertainty about the new Finance Minister and her plans for the economy.

Yet, of note, a central bank survey showed that economists expect November industrial production, to be released on Friday, will show a robust year-on-year gain of 8.7%, implying a month-to-month advance of 0.3%. In October, industrial output had grown 8%.

Thomson Financial Corporate Group – www.thomsonfinancial.com

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