Mexico bonds gain as price worries ebb; stocks up

Reuters: [2008-05-15 23:21:00]

(Recasts, adds details and closing prices)

* Bond prices gain as inflation fears recede

* Tortilla price hike may be tamer than feared

MEXICO CITY, May 15 (Reuters) - Mexican bond prices rose on Thursday, mostly recovering from recent losses as investors worried less about the impact on inflation from a forecast that corn tortilla prices would rise, while stocks rose.

The government's benchmark 10-year peso bond <MX10YT=RR> rose 0.395 of a point in price to bid 98.058, pushing its yield down 6 basis points to 8.04 percent.

The benchmark IPC stock index <.MXX> gained 0.66 percent to 31,542.97 points, while the peso <MXN=> <MEX01> firmed 0.11 percent at the official central bank close to 10.476 per dollar.

Bond investors fear accelerating inflation could push the central bank to raise interest rates this year.

Worries were further stoked after producers of corn flour tortillas on Wednesday said they will soon raise prices for the Mexican staple.

Some media reports said tortilla prices, eaten for almost every Mexican meal, could rise by as much as 40 percent citing a small tortilla-maker group.

The news spooked bond investors, who dumped long-term bonds on Wednesday, pushing the yield on the 10-year bond up 7 basis points. But yields edged down on Thursday as investors questioned how big the increase could be and when it could hit.

"There has been a knee-jerk reaction to these tortilla prices," said Siobhan Morden a local market strategist at ABN AMRO in New York.

Morden added that it seemed likely that the government would be able to structure a new pact with producers to keep tortilla prices down, as it did in early 2007 and renewed several times in the last year.

But many investors were remaining cautious ahead of the central bank's monthly policy review, set for Friday at 9 a.m. (1400 GMT).

While analysts unanimously ruled out any change on Friday in the bank's overnight rate from levels of 7.50 percent, according to a Reuters poll, many are expecting the bank to introduce a tightening bias in tomorrow's statement.

In currency trading, traders said investors were exercising caution ahead of the central bank's monthly review on Friday. IXE brokerage said in a note that the peso could strengthen to around 10.43 per dollar, should the central bank introduce a more hawkish tone to its statement.

In stock trading, shares of miner Grupo Mexico <GMEXICOB.MX>, one of the world's largest copper producers, gained 3.13 percent to 79.20 pesos as copper prices rose nearly 2 percent in New York.

Shares of Cemex <CMXCPO.MX>, the top supplier of cement in the United States, gained 1.64 percent to 30.96 pesos. Its New York traded shares added 2.32 percent to $29.57.

Among losing stocks, America Movil <AMXL.MX>, Latin America's biggest cell phone operator, shed 1.14 percent to 30.41 pesos while its New York traded shares lost 0.43 percent to $58.25. (Reporting by Michael O'Boyle) ((michael.oboyle@reuters.com; +5255-5282-7160; Reuters Messaging: jason.lange.reuters.com@reuters.net)) Keywords: MARKETS MEXICO/

Congress cuts back Bush anti-drug plan for Mexico

Reuters: [2008-05-15 23:21:00]

By David Morgan

WASHINGTON, May 15 (Reuters) - The House of Representatives on Thursday voted to scale back President George W. Bush's plan to aid Mexico in its increasingly deadly war on illegal drug cartels.

The so-called Merida initiative -- which Bush proposed last October as a three-year $1.4 billion package providing aircraft, equipment and training -- was initially pegged to give Mexico $500 million in the current fiscal year ending Sept. 30.

Lawmakers instead reduced this year's segment to $400 million in a 256-166 vote on legislation that also expanded benefits for U.S. veterans of the Iraq and Afghanistan wars and lengthened unemployment benefits for American workers.

The Democrat-controlled chamber sought to restrict support for the Mexican military, while extending resources for social institutions including the country's judiciary.

But analysts said the cutback was less than expected and described the vote as an important U.S. gesture toward Mexico.

More than 1,100 people have been killed in Mexico this year as drug gangs fight each other and the security forces.

The House increased a segment of the Merida initiative to combat drug trafficking in Central America, raising it to $61.5 million from the $50 million initially sought by the White House. Lawmakers also added the Caribbean nations of Haiti and the Dominican Republic as beneficiaries.

The Senate has yet to vote on its own Merida legislation. But the Senate Appropriations Committee was expected on Thursday to propose a measure for formal consideration.

Bush administration officials had urged Congress to avoid large cutbacks that could embarrass the government of Mexican President Felipe Calderon at a time when Washington is pressing for closer security ties between the two countries.

The Merida initiative would not give Mexico money outright. Instead, the Mexican government would receive equipment such as helicopters, planes and inspection scanners as well as training for police, prosecutors and judges.

Calderon, a conservative who has sent 25,000 troops and federal police to fight drug cartels across Mexico since late 2006, pledged last week to take back Mexican streets from drug peddlers and gunmen.

Much of his effort has been focused on fighting drug gangs along the U.S.-Mexico border, especially near Texas.

"Though the amount is reduced, the vote conveys to the Calderon government and the Mexican people that both the U.S. administration and Congress are interested in supporting institutions and strengthening law enforcement," said Armand Peschard-Sverdrup of the Center for Strategic and International Studies in Washington.

On Wednesday, the House Foreign Affairs Committee authorized Congress to spend up to $1.6 billion on the Merida initiative overall.

But the panel's authorization bill said the program should be geared more heavily toward supporting the rule of law, with less assistance for the Mexican military, due in part to concern about human rights abuse allegations. (Additional reporting by Richard Cowan, editing by Philip Barbara) ((david.morgan@reuters.com; +1 202 898 8326; Reuters Messaging: david.morgan.reuters.com@reuters.net)) Keywords: USA MEXICO/MERIDA

U.S. reassures Brazil on territorial waters, fleet

Reuters: [2008-05-15 23:01:00]

By Raymond Colitt

BRASILIA, May 15 (Reuters) - The United States will respect Brazil's maritime claims, including offshore oil reserves, and will use a new naval fleet in Latin America mostly for peaceful purposes, the U.S. commander for the region said on Thursday.

The head of Brazil's oil market regulator had said on Wednesday he was worried the United States might contest the country's rights over huge oil reserves lying in a so-called exclusive economic zone.

"The United States will respect the territorial seas and exclusive economic zones of nations of the world," Adm. James Stavridis, head of the U.S. Southern Command, told reporters in Brasilia when asked about Brazil's concern.

The 1994 United Nations Convention on the Law of the Sea, which the United States has signed but not ratified, says coastal states have exclusive economic zones extending 200 nautical miles (370 km), where they enjoy exclusive rights over all natural resources.

The U.S. Fourth Fleet, which the Navy is re-establishing 58 years after decommissioning it, will help combat drug trafficking in Latin America and the Caribbean, Stavridis said at the end of a defense conference.

But this did not indicate an upsurge in counter-narcotics operations, Stavridis said.

"It is not an offensive force in any way," he said.

Acknowledging the fleet had been "a subject of concern" in the region, the admiral said it would mainly support peacekeeping missions, aid in natural disasters, provide humanitarian relief and take part in naval exercises.

"The largest ship that will work for the Fourth Fleet is a hospital ship," Stavridis said.

Brazil is not concerned about the new fleet, Brazilian Adm. Marcos Martins Torres said. (Editing by Mohammad Zargham) ((ray.colitt@reuters.com; +5561 3426-7021)) Keywords: BRAZIL USA/MILITARY

Reopening NAFTA too risky, ex-Mexican president says

Reuters: [2008-05-15 22:13:00]

WASHINGTON, May 15 (Reuters) - Reopening the North American Free Trade Agreement to address concerns raised by U.S. Democratic presidential candidates could kill the three-way pact, former Mexican President Carlos Salinas said on Thursday.

"We need to change the perception that it would be good to renegotiate the agreement. Any reopened negotiation would lead to its cancellation," Salinas, one of the architects of the pact, said in a speech to the U.S.-Mexico Chamber of Commerce.

Salinas, who was Mexico's president from 1988 to 1994, said reopening the pact would unleash "a Pandora's box" of special interests all wanting the deal changed in their favor.

He said the 14-year-old agreement had greatly benefited all three countries by eliminating costly tariffs and encouraging more cross-border investment.

Both Sen. Barack Obama and Sen. Hillary Clinton said they would want to add stronger labor and environmental provisions to the agreement, as well as change investment provisions that critics have long said favor corporate interests.

"I agree with the president that it will be a Pandora's box because we also will have issues to put on the table," Guy Saint-Jacques, deputy head of mission at Canada's Embassy to the United States, told Reuters at the event.

"I would just like to remind (you) that we are the main supplier of energy to the U.S., over $100 billion per year," Saint-Jacques said. "Canada supplies 18 percent of the oil to the U.S. We supply uranium. We supply electricity. We supply natural gas."

Under NAFTA, "Canada has to basically share its resources with the U.S. This was very contested at the time it was negotiated, but it has turned out to be a big advantage in terms of energy security for the U.S.," Saint-Jacques said.

Trade with Canada also supports some 7 million jobs in the United States, he said.

Both Salinas and Saint-Jacques said there were mechanisms within NAFTA to address any concerns the three countries have without formally reopening the pact. (Editing by Philip Barbara)

((doug.palmer@reuters.com; +1 202 898 8341; Reuters Messaging: doug.palmer.reuters.com@reuters.net)) Keywords: USA TRADE/NAFTA

UPDATE 1-Mexico tortilla prices stable despite forecast hike

Reuters: [2008-05-15 21:21:00]

(Adds details, background)

By Jason Lange

MEXICO CITY, May 15 (Reuters) - Mexican tortilla prices were steady on the streets of the capital on Thursday, despite warnings from an industry group of an imminent price hike that rattled bond investors.

Tortilla shops visited by Reuters and by local radio journalists found prices unchanged from previous weeks at 8.50 pesos per kilogram (about 37 cents per pound).

Mexican newspapers had reported on Wednesday that tortilla prices could jump to as high as 12 pesos per kilogram on Thursday, citing the head of a small industry group.

The newspaper reports spooked investors, who dumped bonds and bid up yields on interest rate futures on bets that rising inflation could force the central bank to raise interest rates.

But staff working at tortilla shops said on Thursday they had heard of the forecasts of price increases only through the media.

"Nobody told us anything about price increases," said a store manager who asked to be identified by his first name, Juan.

Tortillas are thin pieces of unleavened cornbread that are often wrapped around spicy meats and vegetables. They accompany most traditional Mexican meals, and price rises in the staple can stoke inflation.

The head of a major industry group said on Wednesday that prices would rise, but not as high, nor as quickly, as the smaller tortilla-maker group had said.

Rafael Ortega, who heads the National Chamber for the Tortilla and Dough Industry, told Reuters on Wednesday average tortilla prices should rise to 10 pesos ($0.94) per kilo in June. His organization groups together about 40 percent of the nation's tortilla makers.

WARY MARKETS

On Thursday, bond prices mostly recovered and yields on interest rate futures edged down, showing that investors were worrying less about tortilla-fed inflation but still were wary. [nN15298821].

"It seems prices could go up to 10 pesos, but even that would have an effect (on inflation)," a bond trader said.

Global food prices have surged in recent years on bad weather, higher demand from countries like China and the rise of the biofuel industry.

Thousands of people took to the streets last year to protest higher tortilla prices, though Mexico has not experienced nearly as much unrest over food prices as have countries like Haiti or Somalia.

Mexico's government has helped control tortilla prices by subsidizing some fuel and warehousing costs.

($1 = 10.632 pesos) (Additional reporting by Pablo Garibian and Chris Aspin; editing by Jim Marshall) ((jason.lange@reuters.com ; 52 55 5282 7153; Reuters Messaging: jason.lange.reuters.com@reuters.net)) Keywords: MEXICO TORTILLA/