How Venezuela Events Could Affect Markets and Policy

Welcome to Thoughts on the Market. I'm Michael Zizis, Deputy Global Head of Research for Morgan Stanley. And I'm Ariana Salvatore, Head of Public Policy Research. Today, we're talking about the latest events in Venezuela and its implications for global markets. It's Tuesday, January 6th at 10 a.m. in New York. So, Ariana, before we get into it, long-time listeners might have noticed in our intro a change-up in our titles. Ariana, you're stepping in to lead day-to-day public policy research. That's right. And Mike, you're taking on more of a leadership role across the research department globally. Right, which is great news for both of us. And because the interaction between public policy choices and financial markets is as critical as ever, and because collaboration is so important to how we do investment research at Morgan Stanley, tapping into expertise and insight wherever we can find it, you're still going to hear from one of and sometimes both of us here on Thoughts on the Market on a weekly basis. And this week is a great example of this dynamic as we start the new year with investors trying to decide what, if anything, the recent U.S. intervention in Venezuela means for the outlook for markets. Right So to that point the new year has barely begun but it already brought a dramatic geopolitical situation The U capture and arrest of Venezuela president Nicol Maduro an event that can have far implications for oil markets energy equities sovereign credit and politics Ariana thinking from the perspective of the investor what catching your attention right now I think clients have been trying to get their arms around what this means for the future of U foreign policy as well as domestic policymaking here too On the first point, I would say this isn't necessarily a surprise or out of step with the goals that the Trump administration has been at least rhetorically emphasizing all year. which is to say we think this is really just another data point in a pre-existing longer-term trend toward multipolarity. Remember, that involves linkage of economic and national security interests. It comes with its own set of investment themes, many of which we've written about, but one in particular would be elevated levels of defense spending globally as we're in an increasingly insecure geopolitical world. Another tangible takeaway I would say is on the USMCA review. I think the U.S. has likely even more leverage in the upcoming negotiations and likely is going to push even harder for Mexico to put up trade barriers or take active steps to limit Chinese investment or influence in the country. Enforcement here obviously will be critical, as we've said. And ultimately, we do still think the review results in a slightly deeper trade integration than we have right now. But it's possible that you see tariffs on non-USMCA compliant goods higher, for example, throughout these talks. And does this affect at all your expectations for domestic policy choices from the U.S.? I think it's important to emphasize here that we're just seeing an increasingly diminished role for Congress to play. The past year has been punctuated by one U foreign policy actions and a usage of executive authority over a number of different policy areas like immigration tariffs and so on So I would say the clearest takeaway on the domestic front is we're seeing a policymaking pattern that is faster and more unilateral, right? If you don't need time for consensus building on some of these issues, decisions are being made by a smaller and smaller group of people. That in itself just increases policy uncertainty and risk premium, I would say, across the board. But Mike, let's turn it back specifically to Venezuela. One of the most important questions is on what this all means for global oil markets. What are our strategists saying there? Yeah, so oil markets are the natural first place to look when it comes to the impact of these geopolitical events. And the answer more often than not is that the oil market tends not to react too much. And that seems to be the case here following the weekend's Venezuela developments. That's because we don't expect there to be much short-term supply impact. Over the medium term, risks to Venezuela's production skew higher. But while Venezuela famously holds one of the largest oil reserves in the world, it's about 17% of the world's oil reserves. In terms of production, its contribution is relatively small. It's less than 1% of global output. So among the top 10 reserve holders, Venezuela is by far the smallest producer. So you wouldn't expect there to be any real meaningful supply impact to the markets, at least in the near term. So one area where there has been price movement is in the market for Venezuela sovereign bonds They have been priced for low recovery values and the potential restructuring that was far off But now with the U.S. more involved and the prospect of greater foreign investment into the country's oil production, investors have been bidding up the bond price in anticipation of potentially a sooner restructuring and higher recovery value for the bonds. Right. And to that point, our EM sovereign credit strategists anticipate limited spillover to broader LADAM sovereign credit. Any differentiation is more likely to reflect degrees of alignment with the U.S. and exposure to oil prices and potential increases in Venezuelan production, which could leave Mexico and Colombia among relative underperformers. Right. And this seems like it's going to be an important theme all year because the U.S. actions in Venezuela seem to be a demonstration of the government's willingness to intervene in the Western Hemisphere to protect its interests more broadly. That's right. So it's a topic that we could be spending much more time talking about this year. Great. Well, Ariana, thanks for taking the time to talk. Great speaking with you, Mike. and as a reminder if you enjoy thoughts on the market please take a moment to rate and review us wherever you listen and share thoughts on the market with a friend or colleague today the preceding content is informational only and based on information available when created it is not an offer or solicitation nor is it tax or legal advice it does not consider your financial circumstances and objectives and may not be suitable for you