Emerging Markets-LatAm slumps along with commodity prices

Mon Jan 12, 2009 5:33pm EST
By Walter Brandimarte
NEW YORK, Jan 12 (Reuters) - Latin American financial markets posted sharp losses on Monday as slumping prices of raw materials and bleak economic forecasts increased investors'aversion to the commodity-exporting region.Brazil's stocks had their largest daily drop in seven weeks, leading the decline of regional equity markets, on concerns that fourth-quarter earnings reports will show a significant deterioration of the economy.Expectations that Latin American central banks will embark on an aggressive monetary easing campaign to support their economies also weighed on the foreign exchange market. "The economic performance of Latin America has slowed sharply in recent months due to falling commodity prices and declining external demand," RBC Capital Markets' analysts wrote in a research note. "Signs of earnings deterioration should become more apparent from the fourth-quarter results onwards," they said, warning that "credit events" might happen in companies withsignificant debt maturities, slim margins, and weaker liquidity. The MSCI equity index for Latin America .MILA00000PUS fell 4.89 percent, its worst performance since the beginning of December, pressured by a 5.24 percent decline of the Brazilian benchmark Bovespa index .BVSP. In the latest sign of declining consumer demand, General Motors Corp (GM.N) will fire 744 workers at a plant in Brazil's Sao Paulo state, a union representing the workers said. Fordetails, see [ID:nN12337437]. To combat fallout from the global financial crisis,President Luiz Inacio Lula da Silva said Brazil will announce this month a new set of economic measures. [ID:nN12339491]. Mexico's IPC stock index .MXX closed 2.66 percent lower,while an industry association forecast the country's automobile production could fall as much as 20 percent this year.[ID:nN12425648] Stocks of commodity-exporting firms had large losses across the region as oil and metal prices prices plunged. U.S. crude prices dropped nearly 8 percent to below $38 per barrel. In the foreign exchange market, the Brazilian real BRBY and the Mexican peso weakened about 1 percent each, on expectations central banks will respond to the crisis with sharp interest-rate cuts, which would curb demand for local currencies. Mexico's central bank will hold its monetary-policy meeting on Friday, and most analysts are expecting a rate cut of 25 or 50 basis points, while some do not rule out an even greater reduction. "We have updated our monetary policy call to include further easing and front-loading," Barclays Capital analysts wrote in a research note about Mexico. "We now expect a total of 300 basis poings of easing with an initial installment of 50 basis point starting on Jan. 16, including risks of a bolder move," they said. Brazil will hold its rate-setting meeting next week. Chile has already kicked off 2009 with a larger-than-expected 100 basis-point cut, following Colombia which surprised investors with a 50 basis points cut December. Most government bonds also posted losses, with Brazil's benchmark global bond due 2040 falling 0.812 point in price to bid 128.438. Yield spreads between emerging market bonds and U.S. Treasuries, a key gauge of risk aversion, widened 13 basis points to 665 basis points, according to the JP Morgan EMBI+index 11EMJ. (Editing by Leslie Adler)