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EMERGING MARKETS-Latam assets recover from recent losses, Petrobras rebound supports stocks

Susan Mathew
·3 min read
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* Drop in U.S. yields helps risk assets * Brazil stocks recover from worst day in 10 months * Mexican peso rises for first time in 7 sessions (Adds details, updates prices) By Susan Mathew Feb 23 (Reuters) - Brazil shares rose on Tuesday as oil major Petrobras bounced back from a bruising sell-off, with most Latin American assets recovering from a slew of recent losses as pressure from high U.S. yields eased. The Bovespa stock index rose 2.1% after a near 5% slide on Monday, as shares in Petroleo Brasileiro recovered 10% from a 22% plunge that wiped out 71 billion reais ($13 billion) in market value. Petrobras' board is set to meet on Tuesday to rule on Brazilian President Jair Bolsonaro's appointment of former Defense Minister Joaquim Silva e Luna to helm the state-run firm. "Bolsonaro's decision to replace Petrobras' CEO is dashing hopes of Brazil's return to economic orthodoxy," said strategists at BCA Research. Analysts broadly note that the president is adopting populist policies instead of fiscal consolidation ahead of elections 20 months down the line. "The central bank is likely to lift the policy rate in response... which would keep government borrowing costs above the nominal GDP growth rate," they said. "A violation of the fiscal spending rule would weigh further on the real amid higher inflation expectations, and bonds are likely to underperform as rates rise." The real rose 0.3% after marking its worst session in a month on Monday, while dollar bonds and the cost to insure exposure to Brazil's sovereign debt steadied following dramatic falls on Monday. Charts show that Brazil's weighting is declining in the main JPMorgan EM bonds index. A recent spike in U.S. treasury yields had weighed on risk-driven assets, particularly emerging market bonds and currencies, as investors sought safer investment paths. Latin American assets fell the most among their peers. But yields dropped on Tuesday after Federal Reserve Chairman Jerome Powell said the economy still needed central bank support. "One reason for Latam FX struggles may be that markets expect that an inflation overshoot in the U.S. would spill over to other economies, and would be harder to contain in Latam, where central bank credibility is perceived to be weaker," said Ilya Gofshteyn, senior EM macro strategist at Standard Chartered. Mexico's peso rose for the first time in seven days against a stronger dollar. The peso lost 3.7% over the last six days on concerns about factory activity as fuel supply from Texas was impacted by a deep freeze. Chile's peso, which has outperformed its regional peers thanks to strength in the copper price, extended gains into an eight consecutive session. Key Latin American stock indexes and currencies: Latest Daily % change MSCI Emerging Markets 1393.90 -0.27 MSCI LatAm 2330.32 2.07 Brazil Bovespa 114975.20 2.05 Mexico IPC 45274.80 0.73 Chile IPSA 4506.23 -1.38 Argentina MerVal 47672.85 -3.239 Colombia COLCAP 1351.21 -0.07 Currencies Latest Daily % change Brazil real 5.4380 0.30 Mexico peso 20.5595 0.75 Chile peso 705.4 0.14 Colombia peso 3583.72 0.20 Peru sol 3.6517 0.00 Argentina peso 89.5300 -0.10 (interbank) (Reporting by Susan Mathew and Sruthi Shankar in Bengaluru, graphic by Marc Jones in London; Editing by Nick Macfie and Rosalba O'Brien)