December 18, 2013 / 9:00 PM / 4 years ago

Latam markets gain as Fed signals rates to stay low for longer

RIO DE JANEIRO, Dec 18 (Reuters) - Latin American financial markets gained on Wednesday as the Federal Reserve suggested U.S. interest rates will stay low for longer than expected, soothing investors who were surprised by the bank’s decision to start winding down its stimulus program.

Stocks and currencies in the region initially slid in a knee-jerk reaction to the Fed’s announcement that it will cut its $85 billion-a-month bond-buying program by an initial $10 billion.

The move, which generally was not expected until next year, could reduce the supply of dollars that tend to flow into emerging market economies seeking higher returns.

But markets soon bounced back as investors focused on the Fed’s suggestion that it may keep overnight rates near zero “well past the time” that the jobless rate falls below 6.5 percent.

“Liquidity will remain very ample for a very long time, meaning that investors will have no choice other than continuing to look for opportunities in risky assets,” Alberto Bernal, head of research at BullTick Capital Markets, wrote in a note to clients.

The Mexican peso last traded 0.6 percent stronger at 12.8850 per dollar, reversing losses of more than 0.6 percent recorded right after the Fed’s announcement. Mexico’s IPC stock index shot 1.2 percent higher.

Analysts said Mexico should benefit from improving economic conditions in its northern neighbor more than other Latin American economies.

“For Mexico, this should be a positive development as an improvement in the U.S. market will likely result in an improvement in Mexico’s economic conditions,” said Gabriel Lozano, JP Morgan economist for Mexico.

Mexico’s banking regulator Jaime Gonzalez admitted that interest rates are likely to rise in Mexico as the Fed begins to withdraw its stimulus, but added that domestic economic strength would help cushion the blow.

“Markets continue to recognize the fundamentals of the Mexican economy and that we don’t depend exclusively on that additional liquidity that is in the economy.”

While Mexico’s growth is expected to notch a paltry 1.3 percent this year, well below the 3.8 percent recorded in 2012, a host of reforms spearheaded by President Enrique Pena Nieto - including a long awaited opening of the energy sector to private investment - are expected to boost growth going forward.

Most Brazilian markets were already closed when the Fed’s decision was released, but future contracts for stocks and the currency, which were still trading on the BM&FBovespa exchange, also posted gains after an initial slide.

The real , which closed 0.81 percent weaker at 2.34 per dollar prior to the Fed’s decision, trimmed losses in the futures market. Brazil’s benchmark Bovespa index future contracts for February rallied 2.1 percent.

Earlier on Wednesday, Brazil’s Finance Minister Guido Mantega called on U.S. policymakers to start winding down their monetary stimulus sooner rather than later to reduce global market volatility.

Brazil’s real has weakened over 10 percent so far this year, more than most Latin American currencies, as investors worry about a deterioration in the country’s economic fundamentals that could result in a sovereign debt downgrade by at least one ratings firm next year.

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