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EMERGING MARKETS-Brazil markets surge ahead of final vote on pension reform bill

By Sruthi Shankar

(Updates market prices) By Sruthi Shankar Oct 22 (Reuters) - Brazilian markets surged on Tuesday ahead of the expected final approval of a landmark pension reform bill aimed at helping to curb the mounting fiscal deficit in Latin America's largest economy. The benchmark Bovespa stock index jumped 1.1% to touch an all-time high, with banks leading the gains. The MSCI index of Latin American stock markets rose 1.7%. Brazil's real strengthened to as much as 4.06 per dollar, its highest level in two weeks, on relief that the government's key policy this year had entered the home stretch. The currency has taken a toll in the recent weeks after a batch of weak data spurred bets on a deeper interest rate cut from the central bank next week. Indeed, figures on Tuesday showed a measure of Brazilian inflation fell in October to its lowest in over 20 years, cementing the prospect of aggressive rate cuts. Investors instead took heart from pension reform bill, which aims to save the Treasury around 800 billion reais ($195 billion) over the next decade via a range of measures including raising the minimum retirement age and increasing workers' pension contributions. "Amongst EM equity markets, a recovering economy and attractive free cash flow yield mean we are "overweight" Brazil," Citi analysts wrote in a note. "Brazilian equity market relative performance (vs EM) has a high positive correlation to its own currency, so should benefit from an appreciating real." Other Latin American currencies also firmed, with Chile's peso bouncing back even as protesters gathered in Santiago and in other cities. Demonstrations against high Chilean living costs and inequality showed little sign of ending. The peso steadied after a 2.7% slump on Monday, its worst day in more than six years. A more than 1% jump in Chile's stock index helped offset a 4.6% dive Monday, meanwhile, which marked the biggest one-day drop in almost two years. Risk sentiment was lifted by encouraging comments out of Washington and China about their trade negotiations and as investors parsed earnings reports from across the world that were largely above expectations. In Argentina, presidential front-runner Alberto Fernandez called on incumbent Mauricio Macri to keep the peso stable after general elections on Sunday, and avoid a repeat of the currency crash that followed the August primary. Fernandez blew past business-friendly Macri in the primary, setting the stage for an expected outright victory in the Oct. 27 presidential election. The peso plunged more than 30% over the next few days, as investors feared a return of populist policies under Fernandez. The election results could unleash volatility once more, a Reuters poll of 14 economists showed. Key Latin American stock indexes and currencies at 2006 GMT: Stock indexes Latest Daily % change MSCI Emerging Markets 1033.94 0.53 MSCI LatAm 2762.34 1.66 Brazil Bovespa 107197.39 1.11 Mexico IPC 43369.76 -0.08 Chile IPSA 4992.77 0.8 Argentina MerVal 33241.32 2.122 Colombia IGBC 13051.39 0.45 Currencies Latest Daily % change Brazil real 4.0759 1.29 Mexico peso 19.1330 -0.02 Chile peso 723.8 0.25 Colombia peso 3429 0.52 Peru sol 3.349 -0.36 Argentina peso (interbank) 58.6400 -0.22 (Reporting by Sruthi Shankar and Susan Mathew in Bengaluru; Editing by Alistair Bell and Tom Brown)