EMERGING MARKETS-Latam assets weaken on Banxico move, US midterms; Paraguay slides

By Sudeshna Ghoshal, Ragini Mathur and Avinash P

Nov 5 (Reuters) - Most Latin American markets fell on Thursday as investors weighed the implications of heavy Republican losses in this week's US midterm elections, while a surprise interest-rate cut by Mexico's central bank pressured the peso.

Banxico, as the central bank is known, cut its key interest rate by 25 basis points to 6.25%, describing the move as a "one-time adjustment" and said maintaining the new rate level would help return inflation to target.

"Our view remains that Mexico is running policy in an orthodox manner, with a credible central bank and still fairly attractive positive real rates," said Rohit Chopra, portfolio manager at Lazard Asset Management.

However, the Mexican peso extended its declines after the decision. It was last down 0.75%.

"Banxico is taking a considerable risk by easing just as the external environment is becoming less forgiving," said Andres Abadia, chief Latin America economist at Pantheon Macroeconomics.

The move narrows Mexico's rate advantage and risks putting additional pressure on the peso, he added.

Additionally, Banxico raised its fourth-quarter 2026 headline inflation forecast to 3.7% from 3.5% and its core inflation forecast to 3.7% from 3.6%. The Mexican stocks .MXX were up 0.23%

The Mexican peso lost about 4% in October, although the country's stock index was among the region's strongest performers, gaining 8.7%.

That performance contrasted with that of the broader Latin American stock index .MILA00000PUS, which suffered steep losses after Brazilian President Luiz Inacio Lula da Silva's victory in the October 25 runoff election.

Investors were also weighing the broader market implications of the US midterm elections and whether the outcome could alter the trajectory of the US-Israeli war with Iran.

The MSCI's regional equity gauge fell 1.3%, while the broader currency index .MILA00000CUS was down 0.26%.

BRAZIL'S CENTRAL BANK PAUSES EASING CYCLE

Elsewhere in the region, investors continued to assess the implications of shifting political and monetary-policy dynamics.

Brazil's real fell 0.56% against the dollar. The country's central bank paused its easing cycle on Wednesday, citing higher inflation risks.

The decision to halt its run of interest rate cuts after Lula's reelection has prompted some economists to bet on borrowing costs staying at the current elevated level until as late as 2028.

Data also underscored the challenges facing Latin America's largest economy as industrial output fell more than expected in September.

Brazil's benchmark Bovespa stock index .BVSP edged lower 0.54%. Lula is expected to decide on potential fiscal measures after returning later this month from an overseas trip, Brazilian Finance Minister Dario Durigan said on Thursday.

Colombia's central bank on Wednesday lowered its 2026 growth forecast and raised its inflation forecast for this year to 7.1% from 6.9%, moving further away from its long-term 3% target.

Colombia's stock index .COLCAP fell 1.08%, while the peso dropped 0.33%.

In Paraguay, President Santiago Peña resigned on Thursday following the collapse of a prominent digital lender to which he had former business links.

Paraguay's dollar bonds came under pressure across the curve, with the 2044 , 2048 and 2050 issues each losing more than 1.5 cents on the dollar.

The guarani currency traded past 6,500 per dollar according to Paraguay's central bank, before closing at 6,490 for a 4.8% decline on the day.