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. Last Updated: 07/27/2016

Rate Jitters Could Hit Latin America




MEXICO CITY, Mexico -- Latin American stock markets will keep an eye on their powerful northern neighbor this week, with the possibility of another U.S. interest rate threatening to wreak havoc in Mexico and Argentina.


After the U.S. government reported Friday that gross domestic product grew at a breakneck 5.2 percent pace in the second quarter, investors around the world are betting on another rate increase by the Federal Reserve.


Rate jitters are likely to hit particularly hard in Mexico, thanks to its heavy dependence on the United States for export revenues and in Argentina, where the peso currency's peg to the dollar makes the nation particularly sensitive to rate jumps. Brazil's battered stocks could fare better as traders see conditions ripe for a turnaround, though any rebound is expected to hinge heavily on a strong showing in U.S. markets. That leaves Venezuela as the potential bright spot of the week. President Hugo Chavez's win in Sunday's presidential election could prompt investors to gamble that he will stick to his pledge to dedicate more time to fixing the country's economy.


Mexican stocks are vulnerable not only to investor worries about a U.S. rate increase, but also to the lingering effects of a U.S. decision to take action against Mexico for failing to curb the monopolistic powers of telephone giant Telmex. Telmex, the heaviest weighted share on Mexico's index, slid nearly 6 percent Friday on the news, which could increase pressure to break up what Telmex rivals see as a near monopoly.


"Obviously this affair over the monopoly is punishing Telmex shares and for that reason the whole market is falling," said one trader.


Analysts say that although the majority of Mexican companies reported strong earnings in the second quarter, a few notable exceptions tempered an otherwise positive period, including Telmex.


Argentine stocks may extend last week's 4.4 percent slide as investors brace for another increasingly likely U.S. interest rate increase. The benchmark Merval index appeared to be in for a rocky road at least in coming days, though traders said its long-term prospects are not menaced by rising U.S. rates. "We're being careful, buying very cautiously. Conditions are not that good for the short term. For the long term, however, I would buy," said Mariano Arnau, a trader for Raymond James Argentina.


Brazilian shares, which have been battered lower in thin volume by successive losses on Wall Street, may be poised to climb, but there are clouds on the horizon if key foreign markets see-saw or a public graft scandal grows, traders said. "The [Brazilian] market could post a good turnaround [this] week," said Roberto Dotta, fund manager with Tudor Asset Management in Sao Paulo.


But lingering worries that a public scandal will implicate high-ranking government officials could also cloud the market, said dealers. The case involves graft of some $100 billion dollars destined for a public building project. Brazil's benchmark Bovespa index lost 5.2 percent last week to end at a two-week low of 16,485.6 on July 28. The index is down 3.6 percent since the start of the year.