By Carla Mozee
Brazilian equities fell Tuesday, with investors returning from a holiday to reports that China, a key export market for Brazil, is moving forward with a plan to tighten lending activities.
Brazil's Bovespa fell 1.1% to 65,523.73, dragged lower by a 2.5% drop in shares of oil giant and market heavyweight Petroleo Brasileiro (PBR) as oil prices fell on the New York Mercantile Exchange. Oil prices pulled back 0.7% to $74.71 a barrel, with traders assessing the impact on demand for fuel if the world's largest emerging market takes action to curb economic growth.
Trading in Brazil was closed Monday to mark the anniversary of the founding of the city of Sao Paulo.
China has asked several large banks, including the Industrial & Commercial Bank of China , to raise their reserve ratio by an additional 0.5 percentage point, according to a report from Reuters on Tuesday. The requirement reportedly took effect on Tuesday. ICBC, according to a Dow Jones Newswires report, has told its Beijing branches not to grant new loans for the rest of this month.
Expanded bank lending has been a central component in China's stimulus efforts, which, so far, have helped the economy grow by 10.7% in the fourth quarter. Worries that China would move to curb growth have hit Brazilian shares in recent sessions, leaving the Bovespa index with loss 4.5% this year. China last year became Brazil's biggest trading partner.
But the recent pullback in equities across Latin America in recent sessions "may have run its course," wrote Geoffrey Dennis, head of Latin American equity strategy at Citigroup, in a note to clients Tuesday.
"We doubt this is the start of a major sell-off: economies are growing, the dollar looks overbought short term, flows are strong and China will not want to "kill off the golden goose" (the economy)," wrote Dennis. "However, later in 2010, in the face of U.S. rate hikes and more bad news from Greece, investors may have to turn more defensive."
Greece has been grappling with a mounting debt load, although credit markets were calmed Monday following strong demand for the country's bond offering.
The MSCI Latin America index is down more than 7% this year.
Monetary policymakers in Brazil, meanwhile, will announce their decision on the country's key interest rate on Wednesday, with expectations that the Selic will be held steady at 8.75%.
In Sao Paulo trading, shares of Vale (RIO) dropped 2.6% on Tuesday, underperforming other stocks in the steel sector. Vale is the world's largest iron ore supplier and counts China as one of its biggest markets.
Steel producer Usiminas finished modestly higher and Gerdau (GGB) and Companhia Siderurgica Nacional (SID) rose 0.9% and 0.5%, respectively, after Itau Securities said it's "turning positive on steels." The broker said its analysis shows that infrastructure investments could add growth of 4% to 7% on demand for flat-and long-steel products in the next six years.
Itau also named Usiminas as its top pick in the group and upgraded the shares to an outperform rating.
Investors in Brazilian stocks on Tuesday found some cover in the utilities group, the only advancers during the session. There, shares of Cemig (CIG) rose 4.5% and Companhia Paranaense de Energia (ELP) rose 2%.
In Mexico, the IPC equity index rose 0.6% to post its first winning session in six.
Chile's IPSA rose 0.2% to 3,809.37 but Argentina's Merval reversed course to end 0.5% lower at 2,316.25.