Brazilian Stocks Fall on Inflation Concern; Bolsa, Ipsa Slump

By Alexander Ragir and Paulo Winterstein

July 2 (Bloomberg) -- Brazil's Bovespa stock index fell to the lowest in three months, led by homebuilders, steelmakers and miners, on concern accelerating inflation may push interest rates higher and the slowing U.S. economy may reduce demand for metals.

Rossi Residencial SA paced losses for homebuilders after UBS AG said real estate stocks won't gain until there is more clarity on interest rates. Lojas Renner SA, the biggest clothing retailer, fell the most in more than two months. Steelmaker Gerdau SA and miner Cia. Vale do Rio Doce tumbled as concern grew that the U.S. auto slump will cut demand and the government said metal orders declined.

``It's more of the same, people worrying about inflation and interest rates,'' said Saulo Sabba, who helps manage the equivalent of $245 million as investment director at Maxima Asset Management in Rio de Janeiro. ``This market could get hit with a lot more of this before recovering.''

The Bovespa index of most-traded shares on the Sao Paulo exchange slid 2,289.97, or 3.6 percent, to 61,106.22, the lowest since March 31. Stock indexes across Latin America tumbled after oil prices rose to a record and the Dow Jones Industrial Average entered a bear market. Mexico's Bolsa retreated 1.9 percent, while Chile's Ipsa dropped 3.7 percent.

Rossi, Brazil's third-biggest homebuilder, lost 4.4 percent to 10.75 reais. Gafisa SA, Brazil's second-biggest homebuilder, retreated 5.4 percent to 24.70 reais.

``Until there is greater clarity on the duration and magnitude of the ongoing tightening in Brazil, it is difficult to see this sector gaining much traction from a stock performance standpoint,'' UBS analysts including Gordon Lee wrote in a note.

Retailers Decline

Retailers fell on concern that higher borrowing costs may stifle consumer demand. Renner slumped 6.1 percent to 28.91 reais. Natura Cosmeticos SA dropped 4.3 percent to 15.99 reais.

The yield on Brazil's interest-rate futures contract for January 2009 delivery rose 6 basis points to 13.43 percent, leaving it more than 1 percentage point above the central bank's overnight rate, an indication traders anticipate the central bank will keep raising rates to stem inflation.

``The bad news is that the economy is producing near capacity, but is no longer able to meet the sustained expansion of domestic demand,'' wrote Goldman Sachs economists including Paulo Leme, referring to yesterday's industrial production number in a research report today.

A report yesterday showed Brazilian output rose 2.4 percent in May, less than the 4.2 percent median forecast.

Vale fell 5.7 percent to 43.40 reais as most metals traded on the London Metals Exchange declined, with nickel, responsible for almost one-third of Vale revenue in 2007, dropping to a two- year low. The company's possible purchase of assets of Brazilian base-metals miner Paranapanema SA also raised concern about Vale entering other metals markets through a company with more than 1.4 billion reais ($750 million) in debt.

`Taking a Hit'

``Vale has been taking a hit lately on falling metals prices,'' Juliana Chu, analyst at Espirito Santo Securities in Sao Paulo, said by phone. In a note sent to investors about Vale's interest in Paranapanema assets, Chu wrote that ``we wonder if use of these resources for another kind of asset wouldn't be more interesting.''

Vale said yesterday it may try to buy Paranapanema's Caraiba Metais SA, which runs Brazil's only copper smelter, and fertilizer unit Cia. Brasileira de Fertilizantes.

Gerdau fell 7.1 percent to 35.85 reais. Cia. Siderurgica Nacional SA, Brazil's third- largest steelmaker, dropped the most on the Bovespa, losing 7.5 percent to 63.20 reais.

GM, the biggest U.S. automaker, fell to the lowest since 1954 after Merrill Lynch & Co. said it may need to raise as much as $15 billion and faces the possibility of bankruptcy.

``Higher oil, global inflation, bank losses in the U.S. and Europe, all these factors are creating uncertainty and risk aversion, and so investors are selling steel, which had accumulated some fat this year,'' said Pedro Galdi, analyst at SLW Corretora in Sao Paulo.

Food Inflation

Perdigao SA, Brazil's biggest food company, fell 4.3 percent to 40.40 reais. Accelerating food inflation is raising concern that Perdigao's dairy business will suffer in the second quarter, said Brascan Corretora analyst Denise Messer in a phone interview.

JBS SA, the world's biggest beef producer, gained the most in the Bovespa after UBS AG said improved U.S. margins and the resumption of exports to South Korea may boost earnings.

JBS added 4.1 percent to 8.10 reais. Only seven stocks rose today.

In Mexico, the Bolsa dropped for a second day.

Fomento Economico Mexicano SAB, Latin America's largest beverage company, slid 4.3 percent to 44.52 pesos after Banco Santander said it was ``cautious'' on Latin American bottlers due to labor issues and possible increases in costs.

In other Latin America markets, Argentina's Merval slid 3 percent, Peru's Lima General dropped 2.8 percent and Colombia's IGBC fell 0.1 percent. In the U.S., the 30-stock Dow average extended its retreat from the October record to more than the 20 percent, the first time since 2002 the gauge has closed below the threshold that signals a so-called bear market.

To contact the reporters on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net; Paulo Winterstein in Sao Paulo at pwinterstein@bloomberg.net.