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Jump in Oil Prices Gives Brazilian Market the Chills

Latin American stocks were mostly lower, this Tuesday, undermined by heavy profit taking and a jump in oil prices to nearly US$ 67 a barrel. Brazilian shares were further pressured by weaker-than-expected local economic data.

Brazil’s Bovespa Index dropped 414.31 points, or 1.13%. Mexico’s benchmark Bolsa Index tumbled 468.66 points, or 2.47%, while Argentina’s Merval Index added 7.96 points, 0.48%.

Brazilian stocks dropped, as investors cashed in some of the market’s strong early-year gains and fretted over a surge in oil prices in today’s session.

The market got off to a strong start in the first two weeks of the year on expectations for solid economic growth, tame inflation and lower interest rates in 2006.

Investors widely expect Brazil’s central bank to extend its run of interest-rate cuts at its first meeting of 2006 scheduled for today.

However, a recent jump in oil prices has raised concerns that high energy costs will stoke U.S. inflation, thereby inhibiting the Federal Reserve from ending its monetary tightening cycle in the near term. High interest rates in industrialized countries tend to draw funds away from emerging markets.

Among economic indicators, the Brazilian Census Bureau reported that Brazilian retail sales volume rose a seasonally adjusted 0.26% in November from October, missing expectations for an increase between 0.45% and 1.5%. November retail sales rose 4.87% from a year earlier.

Meanwhile, the National Confederation of Industries said utilization of industrial capacity dipped to 80.8% in November from 83.05% a year earlier, due in part to continued high domestic interest rates.

Utilization of industrial capacity was also down compared to October’s reading of 81.0%. Brazil’s Selic interest rate has declined gradually from its peak of 19.75% in August of last year to its current level of 18%.

On the corporate front, aircraft maker Embraer announced yesterday that its executive officers have proposed a change to the company’s capital structure that would include a listing on the Novo Mercado portion of the São Paulo Stock Exchange and on the New York Stock Exchange.

The move is aimed at boosting the company’s access to investment capital. Embraer said today that its board plans to hold a meeting on Thursday to discuss the proposal.

In research, a major investment bank raised its price target for budget airline Gol Linhas Aereas Inteligentes to US$ 31 from US$ 21.50.

"We believe that continued struggles at Varig (Brazil’s third largest domestic carrier) will lead to a better fare environment in 2006 and that Gol is well positioned to take advantage of this opportunity," the bank said.

Elsewhere, Mexican shares sank, as investors took some profits following strong gains so far this year that have seen the IPC index hit five record closing highs. Shares were also pressured by downbeat analyst research on the country’s equities.

An influential investment bank downgraded Mexican stocks to "underweight," while raising Chilean shares to "overweight." The bank said Mexico is the "most extended" of the region’s three major markets in terms of valuation.

In corporate news, Femsa said late yesterday that it has agreed to pay US$ 68 million and assume about US$ 60 million in debt plus an estimated US$ 258 million in tax liabilities for a 68% stake in Brazilian brewer Kaiser.

Meanwhile, telecom company Axtel SA said it swung to a net profit of 306 million pesos in 2005 from a net loss of 80 million pesos in 2004.

Elsewhere, Argentine issues extended recent gains in thin trading amid a dearth of local market news. Shares had come under pressure in December due to mounting local inflation and dissatisfaction with the government’s efforts to contain it. The government has sought to fight inflation by negotiating price agreements with various industries.

Thomson Financial Corporate Group – www.thomsonfinancial.com

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