Bloomberg News

Brazil Stocks Tumble on Slumping Commodities, Currency Losses

September 29, 2008

Brazil's Bovespa (IBOV) index tumbled more than 10 percent, the most in a decade, after the U.S. House rejected a $700 billion bank-rescue plan aimed at restoring confidence in the financial system.

Cia. Vale do Rio Doce dropped to the lowest in more than a decade as Citigroup Inc. cut its profit estimates on the outlook for iron-ore prices. Cia. Siderurgica Nacional SA slid the most since 2001 after JPMorgan Chase & Co. said it may have lost as much as $600 million on a derivatives contract tied to its American depositary shares. Banco do Brasil SA led banks lower on speculation the spreading credit crunch will slow lending growth. Rossi Residencial SA fell the most in five years after saying it will pay almost twice as much to raise money as homebuilders were paying before this month's global credit meltdown.

The U.S. House rejected a $700 billion financial-rescue plan intended to restore confidence in the nation's banking system, dealing a blow to government efforts to contain a lending crisis.

``We're all sitting here with our mouths open,'' said Felipe Taylor, an equity portfolio manager at Ciano Investimentos Gestao, the $142 million Sao Paulo hedge fund run by former central bank chief economist Ilan Goldfajn. ``Nobody thought this wouldn't pass.''

The Bovespa index dropped 10 percent to 45,622.61 at 1:49 p.m. New York time, when trading was stopped. The BM&FBovespa MidLarge Cap index fell 10 percent, while the BM&FBovespa Small Cap index lost 8.7 percent. Mexico's Bolsa index declined 5.5 percent, and Chile's Ipsa fell 4.4 percent. Stocks around the world plunged the most since October 1997 and commodities dropped as governments raced to prop up banks infected by growing U.S. mortgage losses.

Vale Plunges

Vale plunged 12 percent to 30.30 reais. Iron-ore prices probably will rise by 10 percent next year and fall 20 percent in 2010, Citigroup analyst Alexander Hacking wrote in a note to clients today. Citigroup previously forecast a 30 percent jump in 2009 and no change in 2010.

Commodities fell, led by crude oil, gasoline and copper, on concern the U.S. plan to spend $700 billion propping up America's banks will fail avert an economic slowdown that may spread to Europe.

The $700 billion financial rescue plan is being rejected as voting continues in the U.S. House. The vote was at 207 to 226 as the tally was held open while congressional leaders sought to persuade lawmakers to switch sides.

Oil slumped more than $8. The S&P Goldman Sachs Commodity Index of 24 commodities fell 6.7 percent.

CSN Tumbles

CSN fell 17 percent to 36.50 reais. The company has most of its foreign currency debt hedged, while it may report currency- related losses related to the ADR swap, JPMorgan wrote. In July, CSN agreed to make regular interest payments to the bank in exchange for the value of any gain in 29.7 million of its own ADRs plus dividends.

Brazilian pulp and paper makers Aracruz Celulose SA and Votorantim Celulose e Papel SA both dropped more than 5 percent after UBS AG said they may report third-quarter losses on currency fluctuations.

``We are expecting both companies to report poor third quarter results due to declining pulp prices and volumes,'' UBS analysts Edmo Chagas and Carlos Vasques wrote in a note to clients. ``Currency losses could drive companies into losses.''

Slumping Real

Brazil's real slumped 6.2 percent to 1.9671 per dollar, the most in almost two weeks, on concern the bailout plan for U.S. financial institutions won't be enough to prevent more bankruptcies and asset writedowns.

The $700 billion package to shore up banks hammered out by Treasury Secretary Henry Paulson and congressional leaders over the weekend failed to convince investors it will shore up banks saddled with growing mortgage losses. The crisis that began with bad home loans to subprime borrowers in the U.S. is threatening to push the global economy into a recession as consumers lose confidence and banks cut back on lending.

Banco do Brasil fell 12 percent to 20.05 reais. Brazilian bank lending growth may decelerate in September as the spreading global credit crunch makes it harder for banks to raise funds, JPMorgan Chase & Co. said.

Central bank data for lending in September, scheduled to be released on Oct. 30, may show a deceleration in growth in credit for both consumers and companies, analysts Saul Martinez and Frederic de Mariz said in a report today. The analysts also forecast an increase in default rates for lending to individuals. They didn't estimate the size of the increase.

``There's scarcity in liquidity and the situation abroad appears to be worse than people had thought,'' said Debora Morsch, who helps manage the equivalent of $305 million at Solidus Brokerage in Porto Alegre, Brazil. ``The question with the currency risk is which companies were hedging and which were actually speculating on the currency or made bad transactions. We really don't know at this point.''

To contact the reporter on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net.

To contact the editor responsible for this story: Chris Nagi at chrisnagi@bloomberg.net.


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