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Economic Instability Hits Brazil
By Randy Befumo (TMF Templr)

ALEXANDRIA, Va. (Oct. 30, 1997) /FOOLWIRE/ --- Brazil's Bovespa index tumbled 8.9% to 8,944.42 driven by investor concerns over the country's banking system. U.S. investors took this as a sign that the economic instability in Southeast Asia may be spreading to other "emerging" countries.

WHAT IS GOING ON?

Although much of the week has been spent focused on Hong Kong, Thailand, South Korea, and Malaysia, Brazilian stocks have fallen about 25% since Monday. The last time Brazilian markets were in such disarray was after 1995's peso devaluation. Investors are now concerned that Brazil's central bank has spent $5 billion of its $60 billion in reserves to to defend the currency. Should Brazil suffer a currency devaluation, other South American countries would be sure to follow. Additionally, rumors that the largest asset managers in Brazil may have stock losses they cannot cover did nothing to help investor confidence.

WHAT DOES IT MEAN?

Although this move is really being driven by a speculative frenzy and not by any concrete and real economic events, U.S. investors should psychologically prepare for more turmoil in stocks. The irony of this is that the yields on U.S. bonds will likely continue to fall as investors flee to quality, making U.S. stocks even more attractive on a long-term basis.

Other stories of interest:

The Specs on Speculation
The Events Leading to the Southeast Asia Currency Crisis
Hong Kong Phooey

 

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