I\u2019m sure that I was not alone in acknowledging some surprise upon waking up on Saturday morning to discover that US forces had captured and extradited Venezuela\u2019s leader, Nicolas Maduro. Within hours I started fielding questions about what it might mean for markets when they opened Sunday night and Monday morning. Quite frankly, my comments were not the type to generate headlines; as a result, few of them were utilized despite being largely prescient. <\/p>\n\n\n\n
When important geopolitical events occur, I typically revert to my first rule of thumb: stock markets are never the best at interpreting geopolitics.<\/p>\n\n\n\n
My rationale for that statement is relatively straightforward. Stock investors are really good at figuring out things that directly affect equity valuations. If there is a direct, verifiable impact on corporate revenues, earnings, and\/or cash flows, investors tend to incorporate it quickly into stock prices. Something like a regime change in a country that\u2019s already outside the global economic mainstream is not really in stock traders\u2019 purview. The quiescent VIX tells us that there is little expectation that the weekend\u2019s events will increase volatility in the near term.<\/p>\n\n\n\n
That said, bond and especially commodity markets are quite good at interpreting events of that type. Although concerns about drug trafficking were the ostensible reason for ousting Maduro, it became quite clear during the Saturday morning press conference that oil played an important role in the administration\u2019s calculus. However, it is not clear that much can or will change in the short term. Oil futures initially fell, since the events could result in more Venezuelan crude making it onto world markets, but then they reversed when it seems unlikely for that to occur in the near-term. It is apparent, however, that one of the US\u2019 aims for regime change in Venezuela is to improve US companies\u2019 access to those resources. That would increase supply in the longer term, negatively impacting prices, but it hardly seems imminent. The process of rebuilding and modernizing Venezuela\u2019s energy infrastructure will also create winners and losers among various energy companies. Chevron (CVX) is seen as an immediate beneficiary, since they have already been operating in that country for years, leading to that stock\u2019s outsized gains today, helping the energy sector lead the S&P 500.<\/p>\n\n\n\n
Regarding bonds, the picture was and remains muddled. It was possible that we could see a bit of a flight to safety in US Treasuries and some improvement in the long-term inflationary outlook, but it was equally possible that concerns about the costs of foreign engagements and ensuing deficits could offset those benefits. Treasuries\u2019 lukewarm response implies that none of those considerations are significantly impacting those markets.<\/p>\n\n\n\n