Bovespa Drops to Two-Month Low on Brazil Interest Rate Outlook

The Bovespa index fell to a two-month low as homebuilder Brookfield Incorporacoes SA led losses by companies linked to domestic demand amid speculation that policy makers may raise borrowing costs to curb inflation.

Petroleo Brasileiro SA, Brazil’s state-controlled oil company known as Petrobras, retreated after Jefferies & Co. cut its recommendation to hold from buy. Iron-ore producer MMX Mineracao & Metalicos SA followed metals lower. Mining company Vale SA jumped after it agreed to sell gold mined in Brazil and Canada to Silver Wheaton Corp. for $1.9 billion.

The Bovespa fell 0.8 percent to 58,951.07 at the close of trading in Sao Paulo, the lowest since Dec. 7. Forty-seven stocks declined on the gauge while 19 advanced. Most shorter-term Brazilian swap rates rose after Finance Minister Guido Mantega said the government will monitor the price of oil so that state-controlled domestic gasoline prices don’t create losses for Petrobras.

“The market reacted pretty badly to Petrobras’s latest financial statements, which puts pressure on the government so it changes its policy for fuel prices,” Joao Pedro Brugger, who helps oversee 220 million reais at Leme Investimentos in Florianopolis, Brazil, said in a phone interview. “The outlook for inflation is worrisome, and the central bank may end up raising the benchmark rate sooner rather than later.”

‘Not Appropriate’

Petrobras was cleared to raise gasoline prices at refineries by 6.6 percent and diesel by 5.4 percent, according to a regulatory filing last week. The increase trailed analyst estimates. While saying that the government will monitor oil prices so Petrobras “doesn’t incur any loss,” Mantega told reporters in Brasilia yesterday that a second increase in gasoline prices is “not appropriate” right now. Shares fell

2.7 percent today to 17.60 reais.

MMX, the iron-ore producer controlled by billionaire Eike Batista, fell 0.6 percent to 3.25 reais as the Bloomberg Base Metals 3-Month Price Commodity Index sank 0.8 percent amid concern political turmoil in Spain and Italy may hamper governments in responding to the euro-area debt crisis that threatens growth and demand.

“It’s still time to be very cautious with commodities stocks, because those are the companies that have the strongest links with what happens in the global market, where things are still very uncertain,” Fernando Goes, an analyst at Sao Paulo-based brokerage Clear Corretora, said in a phone interview.

Retailer B2W Cia. Global do Varejo lost 3.3 percent to

14.95 reais. Brookfield sank 4.7 percent to 3.47 reais. The BM&FBovespa Real Estate Index declined 0.3 percent.

The real weakened 0.3 percent to 1.9911 per dollar.

Vale Deal

Vale added 1 percent to 38.50 reais. The gold deal announced by the Rio de Janeiro-based producer “will improve the company’s cash flow and reduce the need to increase leverage in 2013,” according to a research note from Banco Itau BBA SA’s analysts Marcos Assumpcao and Andre Pinheiro.

The Bovespa entered a bull market on Jan. 3 after rising 21 percent from last year’s low on June 5 as stimulus from central banks around the world eased concern that economic growth might miss expectations while borrowing costs at a record low in Brazil boosted equity demand. The index has since pared its advance to 12 percent.

Brazil’s benchmark equity gauge trades at 10.9 times analysts’ earnings estimates for the next four quarters, compared with 9.7 for MSCI’s measure of 21 developing nations’ equities, data compiled by Bloomberg show.

Trading volume for stocks in Sao Paulo was 7.2 billion reais today, according to data compiled by Bloomberg. That compares with a daily average of 7.3 billion reais this year through Feb. 4, according to data compiled by the exchange.