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EMERGING MARKETS-Brazil assets tumble on fiscal concerns

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* Brazil's Guedes signals one-off waiver to spending cap * Brazil's real drops ~2%, stocks lose 3% * Petrobras slips as Q3 production falls y-o-y * Mexico's Alfa rises on raising 2021 core earnings forecast (Updates prices) By Ambar Warrick and Susan Mathew Oct 21 (Reuters) - Brazil's real tumbled almost 2% and stocks slumped to 11-month lows on Thursday as concerns over fiscal spending were compounded by weak sentiment, with most other Latin American currencies falling as inflation fears sapped risk appetite. The real dropped to a fresh six-month lows and the 10-year bond hit 3-year lows after economy minister Paulo Guedes opened the door to a one-off breach of a constitutional spending cap to pay for a bigger welfare program proposed by Brazilian President Jair Bolsonaro. Guedes' comments appeared to contradict earlier assurances from Bolsonaro that Brazil could increase payouts without stretching its strict fiscal rules. Increased fiscal risk has seen the Sao Paulo's Bovespa stocks index mark one-day losses of over 3% four times since last month alone. The index is down almost 10% this year compared with the broader emerging markets index trading flat year-to-date. The currency has lost around 8% in 2021 versus a 0.7% rise for broader EM peers. JPMorgan analysts now expect a 125 basis points hike next week and again in December. The monetary authority is already one of the most aggressively hawkish banks in the world as it tries to contain inflation, stoking fears about the economy being choked. Brazil, and most other emerging market economies have been grappling with high inflation this year, driven by rising fuel costs and disruptions in global trade caused by the COVID-19 pandemic. The International Monetary Fund said inflation expectations remain anchored in Mexico, but not in Argentina. Mexico's peso fell 0.4%, off a more-than-three-week high as data showed retail sales stayed flat in August. A pullback in oil prices also weighed on Mexico's peso, while crude exporter Colombia's currency fell 0.3%. Peru's sol fell slightly, with political uncertainty creeping into markets ahead of a key vote in Congress on a new Cabinet next week. Still, the sol had rallied in recent sessions after President Pedro Castillo's recent Cabinet overhaul was seen as more moderate. Among individual stocks, Brazilian oil major Petrobras slumped 3.5% after it reported a decline in production in third quarter from a year ago, while Mexican conglomerate Alfa rose after raising 2021 core earnings forecast. Construction firm, Grupo Carso fell 2.2% after it agreed to repair Mexico City's collapsed metro line at no cost to the government. Brazilian fuel distributors Vibra and Raizen slumped following a protest by tanker drivers in Rio de Janeiro, which led to a stoppage at a fuel supply base they operate. Key Latin American stock indexes and currencies: Stock indexes Latest Daily % change MSCI Emerging Markets 1292.03 -0.7 MSCI LatAm 2154.02 -3.36 Brazil Bovespa 107294.73 -3.15 Mexico IPC 51934.36 -0.7 Chile IPSA 4053.18 0.39 Argentina MerVal 86209.40 -0.972 Colombia COLCAP 1409.11 -0.35 Currencies Latest Daily % change Brazil real 5.6667 -1.85 Mexico peso 20.2846 -0.43 Chile peso 817.9 -0.57 Colombia peso 3778.53 -0.34 Peru sol 3.9422 -0.14 Argentina peso 99.3700 -0.01 (interbank) (Reporting by Ambar Warrick; editing by Jonathan Oatis and Alistair Bell)

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