Bovespa Index Drops on Brazil Rate Outlook, Commodities Tumble

The Bovespa index fell for the third session in four as traders pared wagers for further interest- rate cuts in Brazil after the central bank lowered the benchmark rate by half a point, while commodities slipped on concern Europe’s debt crisis will hurt demand.

Gafisa SA (GFSA3), Brazil’s third-biggest homebuilder by revenue, paced declines for companies that depend on domestic demand. Miners Vale SA (VALE3) and MMX Mineracao & Metalicos SA slumped amid concern declines in the price for iron-ore may deepen as China’s economy slows and the European crisis persists. Petroleo Brasileiro SA, Brazil’s state-controlled oil company, followed crude lower.

The Bovespa lost 2 percent to 53,883.32 at 3:02 p.m. in Sao Paulo. Fifty-nine stocks fell on the gauge while seven rose. The real weakened 1 percent to 1.7914 per dollar.

“Toward the end of the year the central bank may have to get more cautious on inflation,” said Alvaro Bandeira, director of Rio de Janeiro-based brokerage Ativa Corretora. “Europe is continuing to affect risk markets.”

Brazil’s central bank yesterday cut borrowing costs by half a point for a second straight meeting, as growth in Latin America’s biggest economy slows amid the European crisis. Policy makers lowered the benchmark Selic rate to 11.5 percent, as forecast by 61 of 68 analysts surveyed by Bloomberg. Five analysts forecast a 0.75-point reduction, and two expected a full-point cut.

A report today showed that Brazilian inflation slowed in mid-October for the first time in 14 months. The rate remains above the upper limit of the central bank’s target of 4.5 percent plus or minus two percentage points.

Brazil Inflation

Consumer prices, as measured by the IPCA-15 index, rose 7.12 percent in mid-October from a year earlier, the national statistics agency said today, down from 7.33 percent the previous month. Prices rose 0.42 percent in the month through mid-October, less than the 0.45 percent median estimate of 45 analysts surveyed by Bloomberg.

Traders reacted by driving up yields on interest-rate futures. The yield on the contracts due in January 2013 rose five basis points, or 0.05 percentage point, to 10.49 percent.

Gafisa declined 4.2 percent to 5.89 reais as the BM&FBovespa Real Estate (IMOBBV) Index lost 2.3 percent.

Global stocks and commodities slumped as European leaders disagreed on plans to enhance the region’s bailout fund. German Chancellor Angela Merkel canceled a speech to parliament tomorrow because of a deadlock over proposals to enhance the European bailout fund, according to lawmakers. Draft documents detailing plans to boost the facility prompted criticism from some German lawmakers who opposed bailout aid. The Standard & Poor’s GSCI index of 24 raw materials lost 1 percent.

Iron-Ore Prices

Iron ore’s biggest decline in 15 months may worsen as the economy slows in China, the largest importer, the Europe crisis lingers and BHP Billiton Ltd. and Rio Tinto Group increase production, said analysts at Macquarie Group Ltd. and Australia & New Zealand Banking Group Ltd.

Vale, the world’s largest iron-ore producer, slipped 1.9 percent to 36.96 reais. MMX, controlled by billionaire Eike Batista, fell 3.1 percent to 6.64 reais. Petrobras declined 2.8 percent to 18.70 reais.

The Bovespa entered a bear market in July after plunging 20 percent from its 2010 bull-market peak. The measure since extended that drop to 25 percent through yesterday and trades at 9.7 times analysts’ earnings estimates, weekly data compiled by Bloomberg show. That compares to a ratio of 10 for MSCI Inc.’s gauge of 21 developing nations’ equities.

Traders moved 5.8 billion reais ($3.2 billion) in stocks in Sao Paulo yesterday, data compiled by Bloomberg show. That compares to a daily average this year of 6.58 billion reais through Oct. 13, according to data from the exchange.

To contact the reporter on this story: Alexander Cuadros in Sao Paulo at acuadros@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos in New York at papadopoulos@bloomberg.net