Sunday January 17...This year's beat may be Brazilian
By Scott Anderson
TORONTO, Jan 17 (Reuters) - Investors got a real life demonstration of the age-old expression ''what goes up, must come down'' this week courtesy of the Brazilian economy.
And analysts said the volatility experienced this week could be the pattern for much of the year as the world stock markets attempt to come to grips with the latest economic crisis.
After enjoying heady gains in the past few weeks, including an almost 6-percent jump by the Toronto Stock Exchange's key 300 Composite Index in the week ended January 8, the charging bull was quickly corralled by events in South America.
On Wednesday, markets were hit by the news that Brazilian central bank chief Gustavo Franco resigned ''to offer a chance to others with more impetus to widen the realm of actions at the central bank and consolidate the real plan.''
Interim central bank President Francisco Lopez said the real, Brazil's currency, could see a nominal devaluation of nearly 12 percent this year.
This single announcement shaved hundreds of points off market indices around the world, taking many back to near year-end levels. Brazil's Bovespa index dropped 5 percent. The real plunged more than 8 percent.
In typical bungee jump fashion, the Brazilian index on Friday rose a remarkable 33.4 percent -- posting its second biggest jump in history -- after the Central Bank allowed the country's currency to float.
Earlier in the week, however, the news prompted a selloff in the North American markets. By day's end on Wednesday, the TSE 300 was down 68.84 points, or 1 percent, to 6631.99, and New York's Dow Jones Industrial Average dropped 125.12 points, or 1.3 percent, to 9349.56.
Prompting the sell-offs in Canada were the same old demons that had roiled the markets last year.
With Canada's economy dependent on the country's rich natural resources, there were fears the problems in South America would hit resource-based companies.
Much the same effect was felt last year when the Asian economic flu, or ''Asian contagion'', hammered the world equity markets.
There is fear that should the problems in Brazil continue, demand for commodities could weaken further.
Despite the sudden drop by the TSE 300 on Wednesday, which included a 79-point drop off the opening bell and a widening to 212 points in the first 15 minutes, analysts were not expecting the damage to be too severe in the short term.
By Friday, the markets were staging impressive rallies to cap off the week with the TSE 300 up 165.19 points, or 2.5 pct, at 6759.42. In New York, the Dow Jones Industrial Average also logged impressive gains rising 219.62 points, or 2.4 percent, to 9340.55.
There was a good news-bad news scenario with this Brazilian story, however. Analysts welcomed the bad news, noting that it offered a chance for the markets to return to acceptable levels after advancing too far, too fast.
''It was an event-driven correction, but the markets had gone up too quickly and something had to bring it back down and this (the Brazilian crisis) is what will bring it back,'' Craig Strachan, vice-president of research services at TD Evergreen, in Toronto, told Reuters.
However, the news sent investors packing from companies that had exposure to Brazil. Banks were hardest hit on Wednesday, with that sector falling 2.6 percent in Toronto, while base metals shares dipped 2.1 percent.
The problems also prompted companies with business interests in Brazil to reassess their profit projections -- much the same way as companies did during the Asian crisis last year.
Analysts also fear that 1999 will see a rerun of the volatile and uncertain trading patterns of last year when similar problems surfaced in Asia and Russia.
Katherine Beattie, a technical analyst at Standard & Poor's MMS, in Toronto, said there is a real concern about what ''impact it's going to have on other economies,'' noting that Brazil is the eighth-largest economy in the world.
Beattie is predicting a volatile year ahead with many down days ahead as any new tidbits of news coming out of South America could affect the markets.
''We're going to continue to get these little jolts,'' she said. ''The long-term trend is up.''
Although there are going to be uncertain times over the next year, a real indication of the direction the market will take will surface by the end of the month. Historically the strength or weakness of the market during the first month of the year usually dictates the outcome for the remainder of the year.
But, the end of the month also coincides with the Super Bowl and we know that even the outcome of that U.S. football game can impact world markets.
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