Big News, But Not for Markets

I’m 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’s 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. 

When important geopolitical events occur, I typically revert to my first rule of thumb: stock markets are never the best at interpreting geopolitics.

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’s already outside the global economic mainstream is not really in stock traders’ purview.  The quiescent VIX tells us that there is little expectation that the weekend’s events will increase volatility in the near term.

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’s 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’ aims for regime change in Venezuela is to improve US companies’ 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’s 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’s outsized gains today, helping the energy sector lead the S&P 500.

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’ lukewarm response implies that none of those considerations are significantly impacting those markets.

As the morning wears on, it is increasingly clear that stock traders have resumed implementing strategies that were likely being formulated during the quiet weeks prior to now, particularly after the unexpected jump in GDP that was reported on December 23^rd.  Although momentum traders furthered the now-usual gains in technology stocks and metals – the weekend’s events certainly did nothing to negatively impact the latter’s haven status – we see the financial and consumer discretionary sectors following closely behind energy stocks.  Both are beneficiaries of a solid economic backdrop, and it is quite likely that we are seeing allocations from institutional managers who had been on vacation during the prior two weeks.   The weekend’s events were quite noteworthy, but didn’t really affect the mindsets of US investors.