Latin Stks Price In 25-Basis Pt Rate Cut; Sell-Off Likely
September 28, 1998
Dow Jones Newswires
By MARGARITA PALATNIK
Dow Jones Newswires
NEW YORK -- Latin American stocks, which need all the help they can get
after their sad performance this year, have already priced in the potential good
news of a U.S. interest-rate cut, and could see a sell-off Tuesday.
Market participants surveyed said that they discount a 25 basis-point cut in
U.S. federal funds rate by the Federal Open Market Committee Tuesday, thus
leaving Latin American shares ready for profit-taking if consensus estimates
come true.
"25 (basis points) is priced in, 50 would be really good, and no cut would be
really, really bad," said a New York-based trader of Latin American stocks.
"The market will fall on a 25 (basis point) cut," said a dealer at Mexican
brokerage Inverlat. "In that case, I would take profits on strength."
Since U.S. monetary authorities recently acknowledged the importance of
foreign economies' well-being for the U.S., the FOMC meeting - which lately
had elicited big yawns from market watchers - is once again drawing the
world's attention.
However, in this familiar game of wants and expectations, what the market
craves to feed a rally - a 50 bps rate cut - doesn't seem to be in sync with
what it believes will happen.
Financial professionals point out that it's "not the Fed's style" to move rates by
half a point.
"Also, for the Fed to cut 50 (bps) in one shot is a risky signal, because it
implies the crisis is very serious," said the Inverlat dealer.
The federal funds rate now stands at 5.50%. A move by the Fed to lower the
funds rate to 5.25% would be welcomed by investors in Latin American
equities, which have been pummeled in 1998.
Through Friday, Brazilian stocks were down 34% on a year-to-date basis.
Meanwhile, Mexico's IPC index has fallen 29% in 1998 and Argentina's
Merval index is off 43%.
For Deutsche Bank Securities emerging market strategist Geoffrey Dennis, a
25 basis point reduction in the U.S. federal funds rate shouldn't be all that
tragic. In fact, Dennis said the cut could be the first in a series.
"The Fed has a lot of work to do before it can protect the (U.S.) economy
from slowing growth, so the market will be anticipating further cuts," Dennis
said.
This expectation could sustain improved sentiment towards emerging markets
for several weeks, he said, barring any more negative news from other
markets.
But a rosy U.S. rate scenario isn't a bullet-proof shield for Latin American
stocks. For example, Dennis warned, disappointing figures from the Japanese
Tankan survey of business sentiment could dampen the good mood as soon as
this Thursday.
"Japan is a constant (problem) to pay attention to. The problem started in
Japan and will end in Japan," according to Francisco Rivero, head of research
for Mexican brokerage Valores Finamex.
An improvement in Japan's economy would not only benefit neighboring Asian
countries, but, more importantly for Latin America, it would strengthen
commodity prices.
However, as crises go, the flavor-of-the-month is Brazil, the largest economy
in the region, Rivero added.
"We'll be watching the elections (Oct. 4), waiting to see if (president Fernando
Henrique) Cardoso announces a fiscal program, then to see if the market buys
his program, and whether or not Brazil gets a rescue loan backed by the U.S."
and the International Monetary Fund, Rivero said.
"All these events will be critical for the (Latin American) markets to recover
from the ridiculous levels hit in August."
-By Margarita Palatnik; 201-938-2226; margarita.palatnik@cor.dowjones.com
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