Brazil markets plunge on new capital inflow tax

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SAO PAULO Oct 20 (Reuters) - Brazil's stocks and currency plunged on Tuesday in one of the roughest trading days in months as investors bailed in the face of a new government tax on foreign investments in local stocks and bonds.

The benchmark Bovespa index .BVSP sank 2.88 percent to close at 65,303.11, the biggest one-day loss since the index plummeted 3.66 percent on June 22 but still off the day's lows.

Finance Minister Guido Mantega said on Monday the government would charge a 2 percent financial transactions tax on foreign investments in Brazilian stocks and fixed-income securities in a bid to prevent the country's currency from strengthening further. The tax took effect on Tuesday.

The levy may prompt investors to shun stocks traded at the Sao Paulo stock exchange for the companies' American Depositary Receipts traded in New York because of the higher costs, traders said.

"This measure has more of a potential of making overseas investors migrate to the ADRs in New York because they won't have to pay taxes there," said Luiz Roberto Monteiro, an investment analyst at the Souza Barros brokerage in Sao Paulo.

Shares in BM&FBovespa (BVMF3.SA), which operates Brazil's stocks and derivatives exchanges, led losses with a slump of 8.41 percent to 12.41 reais on concerns of reduced trading from overseas investors because of the tax.

Credit Suisse said in a report on Tuesday the tax was a negative for BM&FBovespa and would hurt so-called algorithmic and high-frequency trading very much.

Petrobras and Vale, the two most-widely traded stocks in Brazil, tumbled as investors dumped liquid shares. Petrobras (PETR4.SA) closed 2.3 percent lower at 36.50 reais, also hurt by a 0.65 percent decline in New York crude oil prices CLc1, while mining giant Vale (VALE5.SA) fell 2.17 percent to 40.50 reais.

Steelmaker Usiminas (USIM5.SA) dropped 3.78 percent to 52.15 reais. The company should report on Wednesday a 57 percent plunge in third-quarter profit from a year ago because of lower sales volumes. [ID:nN20430586]

Brazil's currency, the real BRBY, tumbled 2.1 percent to 1.748 per dollar as traders fretted about the effects of the tax on short-term dollar inflows.

Analysts said the real, one of the world's best-performing currencies against the dollar this year, is expected to show resilience against the measures as investors shun the dollar globally. The government is concerned that "excessive" gains in the real may dent the competitiveness of Brazilian goods overseas, thwarting an incipient economic recovery.

"I think the impact is more in the short-term," said Marco Antonio Azevedo, currency trader at Brascan Gestao de Ativos. "In the long-term, the internal fundamentals continue to prevail and the real continues to strengthen."

Brazil's real has rallied about 33.5 percent so far this year against the dollar. The government has repeatedly said it was worried about the strength of the local currency, which was making exports expensive.