The benchmark Ibovespa stock index closed on Thursday 30 December at 56,754 points, a 0.39% gain from the day before Wednesday’s close of 56,534 points. The index had ended 2010 at 69,305 points.

In Brazil, a price index showed a slowdown in inflation, giving policy makers room to continue cutting rates and reducing taxes to stimulate growth. But despite a drop in the IGP-M price index in December, the reading for the year stood at 5.1%.

“Throughout the year we were rudderless, as money managers, economists and the government were not really able to determine what the outlook would be” said Reinaldo Zakalski, director of BI Asset Management in Sao Paulo, adding that the uncertainty made investors reluctant to buy stocks.

“Add to that the weakness of the US economy, overseas investors fleeing, European bank problems and you have the strong retraction in stocks that we saw. Next year I see much of the same until we have more clarity about Europe.”

The tone of caution for investors in Brazil was mirrored in this year’s good performance by more defensive industries, such as phone companies and utilities, as well as makers of reliable consumer items, such as cigarettes and alcoholic beverages, compared with a decline in more capital-intensive industries that rely on robust growth, such as home builders and airlines.

Telephone company Tim Participações (TIMP3.BR) jumped close to 40% this year, while utility Cia Energética de Minas Gerais (CMIG4.BR) added more than a quarter, placing them among the 10 most profitable stock investments in Latin America this year, according to the Economatica consulting firm.

Tobacco company Souza Cruz (CRUZ3.BR) and Cia de Bebidas das Americas (AMBV4.BR), or AmBev, as the region’s biggest brewer is known, both jumped close to 30%.

While consumer growth was a concern for many overseas economies, the relative strength of Brazil’s domestic demand, as its middle class grows, helped lift credit- and debit-card processors Cielo (CIEL3.BR) and Redecard (RDCD3.BR).

Real estate developer Gafisa SA (GFSA3.BR) was among the biggest decliners on the Sao Paulo exchange this year, losing close to two-thirds of its value.

Other big decliners were low-cost airline Gol Linhas Aéreas Inteligentes (GOLL4.BR) and steelmakers Usinas Siderúrgicas de Minas Gerais (USIM5.BR) and Cia Siderúrgica Nacional (CSNA3.BR), which fell more than 40% each.

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Brazilian stocks edged higher on Wednesday and posted hefty gains of about 83% for the year, underscoring the strength of the recovery in an economy viewed as an investor darling.

The benchmark Bovespa index moved up 0.43% to close at 68,588.41 points in volatile but low-volume trading. The index’s 2009 gains of 82.66% stand in stark contrast to the Bovespa’s performance in 2008, when it plunged 41.2%, its second-worst performance in its 41-year history.

The economic crisis that slammed the Bovespa last year has lingered in many parts of the world, making Brazil’s second-quarter exit from recovery stand out that much more.

Brazil snagged a coveted third investment-grade rating in September, when Moody’s Investors Service said the global crisis had helped prove the resilience in Latin America’s largest economy.

Comparatively, Mexico, Brazil’s closest peer in Latin America, saw its sovereign debt downgraded twice.

Two of the world’s biggest initial public offerings came out of Brazil this year – an 8 billion US dollars Santander offering, topping the list, and the 4.3 billion USD VisaNet sale. Economists expect Brazilian stocks to extend their advance in 2010.

Furthermore the money pouring in from abroad has helped the Brazilian currency, strengthen 34% against the greenback so far this year; the Real closed flat at 1.743 per dollar on Wednesday.

Sao Paulo-based consultant firm Economática said the real’s annual appreciation against the greenback was its strongest since the Brazilian currency was introduced in 1994.

In related news Brazil’s Development Bank, or BNDES, revealed it made record loans worth 137 billion Brazilian reais, or 79 billion US dollars in 2009. The value of the loans increased 49% compared with 2008, BNDES President Luciano Coutinho said in a press conference.

According to Coutinho, the record loans made this year strongly influenced Brazil’s recovering investment rate, which was 17.7% of GDP, in the third quarter.

“I expect we will end 2010 at around 20% of GDP,” Coutinho said.

Coutinho said it was necessary to establish an investment rate at around 24% of GDP in the long term to sustain growth of 5.5% to 6% a year.

BNDES said that industry received 60.1 billion Reais of its credits in 2009, 54% more than in 2008 while infrastructure attracted 46.5 billion Reais, or 32% more than last year.

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As of Thursday the tax of 1.5% will be levied on the creation of depositary receipts by companies or investors converting local shares, Economic Policy Secretary Nelson Barbosa told reporters in Brasilia.

He said the move will "balance" out distortions caused by a 2% tax that was imposed last October on foreign investment in local bonds and stocks in a bid to stem a currency rally.

A São Paulo-based spokesman at BM&FBovespa SA, the operator of Latin America's largest exchange, declined to comment. The New York Stock Exchange had no comment.

The Bovespa slid 1.3% Wednesday and the Real declined 0.8% to 1.7255 per dollar. The Real has rallied the most in emerging markets this year, 34%, a surge Mantega said threatens the country's exports when they implemented the 2% tax on Oct. 19. The currency has been little changed since then, sliding 0.4 % to 1.755 per dollar.

Investors can buy ADRs of Brazilian companies and then cancel the depositary receipts and get the underlying share without paying the IOF tax. With the new measure, the Finance Ministry aims to eliminate the incentive to create new ADRs that allow investors to skirt the levy.

Under the new rule, a company or individual investor that deposits a share with a custodian bank to create a new ADR will be charged the tax at the bank, Barbosa said.

Edemir Pinto, chief executive officer of BM&FBovespa, met with Finance Minister Guido Mantega last month in Brasí­lia to lobby for a removal of the IOF tax. Pinto said November 6 the tax had been "harmful" to Brazilian markets.

Banco do Brasil SA, Latin America's biggest bank, said earlier this month that the US had approved plans to begin trading Level 1 ADRs, which are traded over-the-counter. Chief Executive Aldemir Bendine said the ADRs may begin trading by the end of the year.

International investors added 1.14 billion Reais (660 million USD) of Brazilian stocks to their holdings in October, according to the Web site of BM&FBovespa. Investors bought 52.3 billion Reais of stock and sold 51.1 billion Reais. Inflows slowed after the government imposed the tax. Net inflows for the month reached 5 billion Reais on Oct. 19.

Foreign investment fell to about 308 million USD a day after the IOF tax, compared with 985 million USD a day for the first 12 business days of the month, the central bank said Nov. 4.

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The main responsible for the upswing was the great performance of companies linked to raw material, like Petrobras and Vale.

Investors are now attentive to the decision to be taken later today by the Copom, Brazil's Monetary Policy Committee, which is expected to announce the new Selic, Brazil's basic rate of interest.

On Tuesday, Brazil's stock market suffered one of its worst one-day plunges and the currency sank after the government imposed a tax on foreign investments in local stocks and bonds. The Bovespa dropped 2.88% to 65,303.11, after closing at its strongest level since June 2008 the previous session.

The decline in the index was the biggest since it lost 2.5% on August 17. The real meantime slid 2.1% to 1.7547 per dollar, the lowest in two weeks.

Finance Minister Guido Mantega announced Monday the government would charge a 2% financial transactions tax on foreign investments in Brazilian stocks and fixed-income securities in a bid to prevent the country's currency from strengthening further.

But Bovespa also announced plans to press the Brazilian government for alternative ways to curb gains in the currency. The levy, higher than a 1.5% tax scrapped a year ago that didn't cover stocks, will hurt Brazilian investors and small- and medium-sized companies, according to Carlos Kawall, chief financial officer of Sao Paulo-based BM&FBovespa.

"We need to do everything we can from now on, talking to the government, getting support from everyone who sees that this is something that is definitely faulty and could be altered," Kawall, a former Treasury Secretary who served under Mantega in 2006, said during a conference call.

International investors, who account for about a third of Bovespa's stock trading, will likely buy US depositary receipts, punishing smaller Brazilian companies who can't afford the costs of listing overseas, Kawall said. The fact that money raised through ADRs is seen as direct investment and isn't taxed, while local capital raising will be subject to the levy, is one of the "inconsistencies" in the regulation, he said.

Mantega said on Monday that the measure seeks to curb gains in the Real, which has strengthened the most of any major currency this year on the back of higher commodity prices, a credit rating upgrade from Moody's Investors Service and forecasts for faster economic growth.

The tax will reduce the efficiency of Brazil's capital markets and "divert" money needed to finance the country's economic growth, according to a statement signed by BM&FBovespa and groups representing Brazil's pension funds, publicly traded companies and investment banking industry.

"So who gets hurt? We get hurt and that's what markets are suggesting today," Kawall said on yesterday's call. "Local small- and medium-cap companies get hurt because they cannot deal with the cost of issuing ADRs. The local investor gets hurt because they might have less liquidity here over time if this measure prevails".

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The index grew 4.11% this week, 8,43% this month, and 77.64% this year. The main contributors to this rally are Petrobras PN (up 1.24% to 36.60 reais), Vale PNA (up 0.69%, to 40.69 reais).

For a few minutes the dollar went down to 1.69 Brazilian reais. Foreign inflow of capital and the perspective of the new IPOs (Initial Public Offerings) have depressed exchanges since September 3 2008.
Brazil's real closed at 1.703 reais to the dollar, a 1.38% decline.

On Wednesday, traders noted the local stocks index began the session moving higher following an enthusiastic reaction to upbeat earnings reports abroad, where heavyweight bank and technology sector players JPMorgan Chase & Co. and Intel Corp. posted encouraging third-quarter results. Furthermore Citigroup raised its year end target for Brazil Bovespa's index to 70.000

Highly sensitive to metals and food exports, rising international commodities prices continued to provide support for major local players in the Brazilian market.

The market was also boosted by the announcement from Vale Doce SA, the world's largest iron ore exporter that it had reached an agreement with the state of Minas Gerais. It also was revealed that they are in negotiations with the Chinese to sell them iron.

The agreement unveils projects to develop and expand its production capacity in the Minas Gerais state in order to meet the growing global iron ore demand. These projects are Apolo, Conceição Itabiritos and Vargem Grande, whose investments are estimated at approximately 9.5 billion reais, approximately 5.6 billion reais.

The Dow Jones Industrial Average on Wednesday topped the 10,000 mark for the first time in a year. World markets were boosted by the news that US bank JP Morgan Chase reported a better-than-expected profit in the July-to-September quarter.  The Dow closed 0.47% up at 10,062.

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The flotation, in both São Paulo and New York, was the biggest in the world since Visa's offering in March 2008.

Santander will use some of the proceeds to expand its branch network and install automatic teller machines. It will also boost its capital reserves.

Santander is the third largest private-sector bank in Brazil by assets. It has a market share of about 10%, with just over 3,600 branches across the country, having expanded through six domestic takeovers over the past 12 years.

The unit is one of Santander's most profitable businesses – making up about 20% of its total net income in the first half of 2009.

The bank had increased the number of shares it put up for sale, to meet demand from investors.

The previous largest initial public offering (IPO) in Brazil was that of credit card processor VisaNet in June.

The high level of demand for the offer was seen as an indication that considerable interest had returned to the IPO market, according to analysts.

On Wednesday, Banco Santander shares closed at 22.62 Brazilian reais (US $12.94), lower than the initial price of 23.50 reais. Stocks traded on the New York Stock Exchange fell 3% from US$ 13.42 to US$ 13.01. 

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The surprising result, however, was far from encouraging for those who have been investing in Brazil. The accumulated Bovespa losses still total 47.7% for the year and 54.6% compared to the market peak last May 20. 

Meanwhile, after sharp gain in recent weeks the dollar went down a few notches for the second straight day. In the first two days of the week the greenback lost 6.23%, closing at 2.183 reais per dollar. The American currency has shot up 14.5% since the beginning of the month.

Brazilian investors are betting that the Fed will cut interest rates in the US again, this Wednesday, encouraging foreigners to go back to Brazil's stock market. All the 66 companies listed in the Ibovespa index went up.

Finance Minister, Guido Mantega, announced that the government will offer a new 3 billion reais (US$ 1.4 billion) line of financing to help the building sector. The news was enough to catapult construction companies trading at Bovespa. Cyrela's shares for example, climbed up 33.55%, to 10.35 reais. Gafisa also had a dramatic 29.5% jump to 13.99 reais.

It was also a sunny day for financial institutions and commodity-linked companies. The steel firm Companhia Siderúrgica Nacional's shares gained 21.7% making their share a 28 reais value. Among banks, Unibanco got the best of it, reaping a 13.9% increase to 11.71 reais a share.

Despite the market euphoria Mantega didn't have an optimistic tone. Talking to entrepreneurs participating in the 3rd National Encounter of the Industry, the minister told them that the financial crisis will last long and will have strong impact in the real economy. "It's going to slow down the whole world. This is becoming clear right now."

Mantega believes that  lack of credit will be one of the main causes for the reduction of economic activity throughout the world. "It is impressive," he said, "how the lack of credit can propagate to the world economy. There's a forecast of economic recession that I hope will not turn into a depression. This is the challenge for the advanced countries. The economic packages only mitigated the problem, but the credit problem hasn't been solved yet."

The minister also said that the Brazilian government is considering the possibility of delaying charging taxes as a way to deal with the crisis. That would be in response to a request made by Armando Monteiro Neto, the president of the CNI (National Confederation of Industries).

Trade Deficit

For the eighth time this year, Brazil posted a weekly trade deficit. According to figures supplied by the Brazilian Ministry of Development, Industry and Foreign Trade, exports in the fourth week of October totaled US$ 4.023 billion, a figure lower than that of imports (US$ 4.121 billion), resulting in a trade deficit of US$ 98 million.

The last weekly trade deficit this year had been recorded in the fourth week of August, and totaled US$ 840 million. So far this month, the balance of trade is running a surplus of US$ 776 million, as against US$ 3.432 billion during the same period in 2007.

So far this month, exports total US$ 14.964 billion and imports, US$ 14.188 billion. In the accumulated result for the year, the trade surplus is now US$ 20.432 billion, the result of US$ 165.832 billion in exports and US$ 145.4 billion in imports. From January until the fourth week of October 2007, the trade surplus was US$ 33.589 billion.

Brazil's currency the real also skidded 4.53% lower to 2.19 per dollar from 2.095 on Tuesday, despite a one billion in dollar-selling intervention by the Brazilian central bank.

Brazil's benchmark stock index crumbled after notching a 17% gain the two previous sessions, with heavyweights Petrobras and Vale posting big losses along with major banks.

The Bovespa index of the Sao Paulo stock exchange slumped to 37,412.54 in afternoon trade, prompting an automatic 30-minute trading halt, after ending Tuesday at 41,569.03. It continued its slide after trading resumed, for a loss of 11.04%.

It was the fourth halt due to a 10-percent fall since the start of last week.

Brazil, Latin America largest economy, has been exposed to the global crisis with many investors fearing that its once-promising emerging-market status could be in for a rough time with declining commodity prices.

Meantime in neighboring Argentina the Merval index plunged 12.14% on Wednesday, the highest one day drop since September 1998. So far in October the Merval has lost 25.81%. The collapse follows Tuesday strong recovery of almost 11%.

In Chile the closing fall was almost a victory after having slid 2%: the IPSA index was up 0.40% and the IGPA was down 0.48%. However the Chilean peso lost against the US dollar which again was up to 625.

But in Peru and is spite of a report indicating the economy was steaming ahead at 9%, fears about a world recession plunged the local stock exchange. The IGBVL lost 8.56 and the ISBVL, 10.96%

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According to Rivero, the combined value of publicly listed companies was 1.927 trillion reais (US$ 1.230 trillion). The highest figure in the history of the country, 2.3 trillion reais (US$ 1.468 trillion), was recorded in May 2008.

According to Economática, from May to July 31, the combined value of the companies decreased by 373 billion reais (US$ 238 billion), or 16.2%. Petrobras and Vale do Rio Doce, whose shares are the most traded at the São Paulo Stock Exchange (Bovespa), were the companies that spearheaded the reduction. According to the consultancy firm, they answered to a 47.4% share of total losses, or 176.9 billion reais (US$ 112.9 billion).

Petrobras alone lost 116.8 billion reais (US$ 74 billion), a figure higher than the market value of Bradesco, one of Brazil's largest banks, which stood at 95.8 billion reais (US$ 61.1 billion).

Vale lost 60.1 billion reais (US$ 38.3 billion) in market value from May to July, a total similar to the value of the Bank ok Brazil (BB), another of Brazil's leading banks, which was worth July 63.8 billion reais (US$ 40.7 billion) in late July.

The BB had the third largest loss in market value from May to July, still according to Economática. The reduction was 18.98 billion reais (US$ 12.1 billion). According to the consultancy firm, the 10 largest publicly listed companies answered to 77.5% of losses, or 289.2 billion reais (US$ 184.6 billion).

Exports

Brazilian exports set a monthly record in July. Foreign shipments totaled US$ 20.453 billion, growth of 38.6% in average daily exports compared with the same month last year, according to figures disclosed today (01) by the Brazilian Ministry of Development, Industry and Foreign Trade.

Imports reached a record high in July as well. They totaled US$ 17.149 billion, growth of 52.2% in average daily imports over the same month in 2007. There was a US$ 3.304 billion surplus on the Brazilian side, a figure 5.5% lower than in July last year, considering the daily average. Flow of trade, i.e., the sum of exports and imports, stood at US$ 37.602 billion in the month.

In the accumulated result for the year so far, exports have totaled US$ 111.098 billion, growth of 27.2% in the average per business day compared with the first seven months of 2007. Imports totaled US$ 96.445 billion from January to July, representing growth of 52.1% in the daily average.

Accumulated trade surplus this year is US$ 14.653 billion so far, a figure 38.7% lower than recorded in the first half of last year.

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Another area which in 2007 attracted record foreign capital was fixed rate bonds and the stock exchange, totaling US$ 39.7 billion compared to US$ 14.68 billion in 2006, with an all time record of US$ 8.7 billion last December, said Altamir Lopes, head of the Economics Department of the Central Bank.

However Lopes admitted that world financial turbulence has resulted in a net loss of US$ 1.8 billion in the local shares and bonds markets during January.

"Global financial and credit market turmoil has prompted investors to cash out of short-term investments that aren't directly related to the economy's future prospects, leading to an outflow of US$ 1.8 billion from Brazilian stocks and fixed-rate bonds so far this month," said Lopes.

For this year the Central Bank estimates an inflow of US$ 26 billion into the shares and bonds.

"In spite of the current volatility we observe a continued inflow of funds that hinge on confidence, economic fundamentals and the prospects of the Brazilian economy are going well. The outflow is a pattern common to all stock exchanges round the world."

Brazil ended 2007 with a positive current account of US$ 3.6 billion (0.27% of GDP, below the US$ 13.6 billion of 2006) given a significant reduction in the country's trade surplus and an increase in profits sent overseas.

Foreign investment has accelerated in Brazil as the central bank has built up credibility by beating its inflation target for two straight years at the same time that Latin America's biggest economy is expanding at the fastest pace since 2004.

The central bank's inflation target was first adopted in 1999. The bank now targets inflation of 4.5%, plus or minus 2 percentage points to account for unexpected price shocks.

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