Our Deputy Director of Global Research Michael Zezas and our U.S.
Public Policy Strategist Ariana Salvatore discuss the
implications of the U.S action in Venezuela for global markets,
foreign and domestic policy.
Read more insights from Morgan Stanley.
----- Transcript -----
Michael Zezas: Welcome to Thoughts on the
Market. I'm Michael Zezas, Deputy Global Head of Research for
Morgan Stanley.
Ariana Salvatore: And I'm Ariana Salvatore,
Head of Public Policy Research.
Michael Zezas: Today we're talking about
the latest events in Venezuela and its implications for global
markets.
It's Tuesday, January 6th at 10am in New York.
So, Ariana, before we get into it: Long time listeners might have
noticed in our intro, a changeup in our titles. Ariana, you're
stepping in to lead day-to-day public policy research.
Ariana Salvatore: That's right. And Mike,
you're taking on more of a leadership role across the research
department globally.
Michael Zezas: 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.
Ariana Salvatore: 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.
Michael Zezas: Right. So, to that point,
the New Year's barely begun, but it's already brought a dramatic
geopolitical situation: The U.S. capture and arrest of
Venezuela's President Nicolas Maduro – an event that can have far
reaching implications for oil markets, energy, equities,
sovereign credit, and politics.
Ariana, thinking from the perspective of the investor, what's
catching your attention right now?
Ariana Salvatore: I think clients have been
trying to get their arms around what this means for the future of
U.S. foreign policy, as well as domestic policy making 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
interest. 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.
Michael Zezas: And does this affect at all
your expectations for domestic policy choices from the
U.S.?
Ariana Salvatore: 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-off US 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 policy making 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 premia, 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?
Michael Zezas: 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 percent of the world’s oil
reserves – in terms of production, its contribution is relatively
small. It's less than 1 percent 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 in 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.
Ariana Salvatore: Right. And to that point,
our EM sovereign credit strategists anticipate limited spillover
to broader LatAm 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 Columbia among relative under
underperformers.
Michael Zezas: 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.
Ariana Salvatore: That's right. So, it's a
topic that we could be spending much more time talking about this
year.
Michael Zezas: Great. Well, Ariana, thanks
for taking the time to talk.
Ariana Salvatore: Great speaking with you,
Mike.
Michael Zezas: 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.
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