Oil prices fell but gold and defence shares rose as markets had their first real stab at reacting to the US snatch-and-grab raid in Venezuela and its ongoing fallout.
Markets are never very good at pricing geopolitical risk or events. Usually, as an investor, it’s best to keep calm and carry on – fundamentals win out in the end.
But for now there is a considerable degree of headline risk around Venezuela that traders should be mindful of.
President Trump has threatened military action against Colombia, warning it could be next if it fails to combat illicit drug trafficking. He’s also warning against Mexico and Greenland.
Why are oil prices down? The chief headline channel if you like for a market reaction to Venezuela is probably oil but it’s only 1% of global supply, so it’s not a big surprise that we have seen little to no impact, and prices are indeed lower this morning after OPEC+ agreed over the weekend to keep output steady amid a rift among members of the cartel.
The market is probably more focused on the overhang of 2025 oversupply than near-term geopolitical risks. Longer term, with 17% of proven global oil reserves, anything to improve Venezuela’s oil production would serve to lower prices and it looks like the market reaction is focused more barrels coming online.
Trump promised US companies would go in and “spend billions of dollars, fix the badly broken [oil] infrastructure”. I’m not sure we are about to see Chevron come in and turn Venezuela back to pumping 4m barrels a day – it will take year and require tens of billions of dollars of investment. Is there really going to be this kind of investment? How long does it take? Will the generals in charge of Venezuela really give up control? Chevron – the only major US oil producer still operating in Venezuela under a special Treasury licence – jumped 10% in London this morning on expectations it will be the main beneficiary.
The real question is what happens next – where does this lead in terms of further intervention by the US in the region or elsewhere? Is Colombia next? Is Greenland? And what is the signal to China – when Taiwan? The point is that while this was a startling event, it simply reinforces and amplifies the themes of the last few years – fragmentation of the old order, unilateralism, geopolitical risks rising – a world where ‘real’ assets like stocks and precious metals are vital.
In Europe in early trade defence stocks rallied for obvious reasons – BAE Systems and Babcock among the top gainers on the FTSE 100, rising 3-4% at the start of trading. Precious metals miners Endeavour and Fresnillo rose over 4% as gold prices surged. The FTSE 100 opened above 10,000 but pared gains. Risk sentiment remains pretty solid despite the headlines, but we are clearly seeing a flight to safety down the precious metal channel. US futures are higher while Treasury yields are lower.
Wall Street is coming off a tough week but a better Friday. The S&P 500 broke a four-day losing streak, although the Nasdaq 100 fell. Chip stocks did well as Nvidia, TSMC, Micron and AMD rose, though some of the large-cap hyperscalers like Meta, Amazon and Microsoft fell, as did some of the higher beta AI proxies such as Palantir. Tesla fell for a seventh straight day as Q4 deliveries declined 16%. Good job it’s not a car company any longer.
Leave a Comment