Brazil Stocks Gain on Prospect of Bigger Rate Cuts; Bolsa Drops

By Alexander Ragir and William Freebairn
Jan. 13 (Bloomberg) -- Brazilian stocks rose for the first time in three days on speculation the central bank will make bigger cuts in interest rates to boost the economy.
Redecard SA, which processes credit-card purchases for Mastercard Inc., led gains on the Bovespa index as traders increased bets the main rate may be cut by 75 basis points next week. Retailer Lojas Renner SA advanced as Itau Corretora said falling rates create an “unprecedented” growth environment for Brazil. Petroleo Brasileiro SA gained as oil rose for the first time in six days. Brazilian banks fell after Morgan Stanley downgraded the industry on concern about the earnings outlook.
“Through 2009, monetary conditions will become very auspicious for a recovery,” Itau’s chief economist Guilherme de Nobrega wrote in a note. An expected 3 percentage point cut in the benchmark Selic rate, along with a weaker currency “will create an unprecedented environment for growth.”
Brazil’s Bovespa index added 140.76, or 0.4 percent, to 39,544.23. Mexico’s Bolsa slid 0.5 percent and Chile’s Ipsa rose 0.1 percent. The MSCI Emerging Markets index lost 0.4 percent.
Investors stepped up bets on Brazil rate reductions today, pushing down the yield on the overnight interbank futures contract maturing in January 2010 by 12 basis points, or 0.12 percentage point, to 11.56 percent.
Rate Cuts
Economists predict the central bank will cut the rate to 13 percent at its next policy meeting, on Jan. 21, according to the median of six estimates compiled by Bloomberg. The reduction would be the first since September 2007.
Redecard climbed 6.2 percent to 25.80 reais.
Lojas Renner led gains for retailers, rising 1.6 percent to 15.80 reais, on the prospect that lower rates would spur consumer spending.
Lower rates may hurt the nation’s banks, Morgan Stanley said.
“Most large cap banks in Brazil have asset-sensitive balance sheets; thus, falling interest rates normally result in margin compression,” analyst Jorge Kuri wrote. “This, combined with a sharp deceleration in volumes and a pickup in non- performing loans, makes the earnings outlook less favorable.”
Profit margins fall with interest rates because short-term investments tied to the benchmark Selic rate represent “the bulk” of their assets, according to Morgan Stanley.