* Mexican economy shrinks in December * U.S. short-term yields rise, rate hike seen in March * Peru's sol falls as more Las Bambas disruption expected (Adds details, updates prices) By Susan Mathew and Ambar Warrick Jan 18 (Reuters) - Mexico's peso retreated from two-month highs on Tuesday on downbeat economic growth data, while broader emerging markets were pressured by rising U.S. Treasury yields and a stronger dollar. The peso slipped 0.6% after data showed Mexico's economy likely shrank by 0.2% in December compared with the same month a year earlier, pointing to a sluggish performance in the final quarter of 2021. JPMorgan strategists expect to see a pick-up in political noise during the first quarter amid contention over increased regulation in the country's energy sector, and President Andres Manuel Lopez Obrador's mandate to hold a recall referendum halfway through his term to decide if he continues in office. Peru's sol dropped 0.1% after Peruvian communities rejected a government proposal to prevent further blockades at Las Bambas copper mine, pointing towards more disruptions in the country's key copper exports. Brazil's real sank 0.8% in volatile trade as the deadline loomed for President Jair Bolsonaro to sign the 2022 budget, which could see a government veto of up to 9 billion reais ($1.63 billion) in the 2022 budget bill. The Congress has already approved the budget. The veto was made to restore room for spending that was underestimated by Congress. "The approval of the budget should offer markets some relief after some hectic months and we keep a bullish bias on Brazilian local assets," JPM strategists said, adding that the central bank's aggressive hiking cycle also provides support. "Our economists expect another 150 basis point hike in February, followed by a final 100bp one in March which should take the policy rate to 11.75%.... and as inflation starts to move lower, real rates will look increasingly appealing." With investors starting to price in a hawkish message from the U.S. Federal Reserve at its meeting next week, U.S. Treasury yields surged, and lifted the dollar, pressuring riskier assets. Despite oil prices at 7-year highs, Colombia's peso lost 0.7%. Most Latin American stocks retreated, tracking steep losses in Wall Street. Elsewhere, Russia's rouble sank more than 1% as tensions between Moscow and the West showed little signs of abating. U.S. President Joe Biden's top diplomat will seek to defuse a crisis with Moscow over Ukraine when he meets the Russian foreign minister in Geneva this week following visits with Ukrainian leaders in Kyiv and European officials in Berlin. Key Latin American stock indexes and currencies: Latest Daily % change MSCI Emerging Markets 1240.84 -1.08 MSCI LatAm 2195.06 -0.83 Brazil Bovespa 106183.26 -0.18 Mexico IPC 53391.20 -1.08 Chile IPSA 4503.31 0.67 Argentina MerVal 83495.45 -1.815 Colombia COLCAP 1578.89 3.72 Currencies Latest Daily % change Brazil real 5.5705 -0.81 Mexico peso 20.4143 -0.65 Chile peso 818.6 0.38 Colombia peso 4033.2 -0.74 Peru sol 3.8473 -0.13 Argentina peso 104.1600 -0.07 (interbank) (Reporting by Susan Mathew in Bengaluru; Editing by Andrea Ricci and Sandra Maler)
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