by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with some observations on the US seizure of Venezuelan President Maduro on Saturday. We next review several other international and US developments with the potential to affect the financial markets today, including the latest sign that economic decoupling between the US and China continues and indications that China’s aggressive effort to build up its inventories of critical minerals is having a negative impact on Europe’s economy.

United States-Venezuela: By now, the US’s early-Saturday capture of Venezuelan President Maduro has been heavily reported, so we won’t go into a detailed discussion of it. Rather, we will make a few observations about the geopolitical implications for investors going forward. Our bottom line is that the actual implications for Venezuela and its enormous oil reserves remain in question at this moment. What is clear is that the US administration has provided a very direct signal as to how it intends to approach foreign policy going forward.

• Despite President Trump’s assertion that the US would “run” Venezuela until a transition of power could be implemented, Secretary of State Rubio has sketched out a relationship that is more like a US guardianship, in which the US would oversee and exert pressure on the Venezuelan government to transition toward democracy and capitalism. The extent of US involvement in the Venezuelan government is a key question going forward.
• Just as important, the fact that China, Russia, and other adversary countries could only offer rhetorical support to Maduro will likely undermine their geopolitical power. China has recently been able to flex its geopolitical muscles based on its control of key mineral and technological supplies — and may do so again here to retaliate — but the US operation against Venezuela has underscored how China still can’t project military power to force the US to back down in Latin America.
• In any case, the US action underscores the administration’s focus on dominating the Western Hemisphere, as it laid out in its National Security Strategy in December. Officials have presented several different justifications for the action in Venezuela, from fighting drug trafficking and terrorism to re-establishing democracy and punishing Maduro for nationalizing US energy assets. That’s consistent with the National Security Strategy’s focus on economic relations, which we’ll delve more into in future reports.
• Beyond seizing Maduro and subjecting him to the US justice system, the action is a signal to other left-wing governments in Latin America, especially Bogota, Managua, and Havana. The implication for Cuba is especially stark. If the US now forces Venezuela to restrict its energy exports to Cuba, its regime would become increasingly fragile, and that could set up a similar operation against Cuba. If you’ve been wanting to visit Havana, it would be no surprise if you could do so visa-free a year from now.
• The move against Venezuela also signals that the US will be prepared to pressure other Latin American countries to align their economic policies with those of the US. In the near term, that could force deregulation and other improved policies on governments in the region, potentially providing a boost to Latin American stock markets.
• In terms of market reactions, global oil prices as of this writing are down less than 1%, consistent with an expectation for an eventual rise in Venezuelan oil production and exports, but no appreciable change in the near term. On the other hand, major US energy stocks are surging, probably reflecting optimism about compensation for Venezuela’s past nationalization of their assets and future work rebuilding the country’s oil infrastructure.

United States-China: President Trump on Friday signed an executive order forcing HieFo Corp., a Delaware-registered firm, to divest its holdings of US semiconductor assets, on the basis that HieFo’s ownership by a Chinese citizen could endanger US national security. The move shows that US-China decoupling in terms of capital flows and foreign ownership remains in place, presenting risks for investors.

China-European Union: A top official with Novelis, the EU’s top aluminum recycler, has warned that China is aggressively buying up scrap aluminum from the EU’s recycling system and using it as a low-cost input for aluminum products that it then sends back to the EU. Now that the EU has essentially lost its primary aluminum production, the official warns that the Chinese action could also destroy the bloc’s scrap production industry.

• The situation illustrates how the EU is increasingly concerned about the risks from China’s aggressive economic policies.
• More broadly, a range of recent reports has shown that China is rapidly building up its reserves of critical minerals and industrial inputs, from oil to copper. Today’s report suggests it may also be bulking up its inventories of aluminum. Some observers speculate that the inventory buildup aims to set the stage for a potential war over Taiwan.
• Broader still, such commodity hoarding is what we have long expected as the US steps back from its traditional role as the global hegemon and the world fractures into relatively separate geopolitical and economic blocs or spheres of influence. That should buoy the prices of hoarded commodities and is a key reason why Confluence launched its Global Hard Assets portfolio many years ago.

United Kingdom-European Union: UK Prime Minister Starmer yesterday declared that it is in his country’s national interest to align more closely with the EU, although he stopped short of calling for a reversal of Brexit or rejoining the EU’s common market. Starmer’s statement comes as he struggles to re-invigorate British economic growth and bring down elevated consumer prices. Lacking progress on those efforts, his ruling Labour Party continues to bleed public support.

Germany: The share price of banking giant Deutsche Bank today rose above the firm’s book value for the first time since 2008, marking not only the slow improvement in Europe’s banking environment since the Great Financial Crisis but also the institution’s long struggle to put its legal and operational struggles behind it.

France: The Financial Times today carries an article discussing how French business leaders have now become much more comfortable meeting with politicians from the resurgent far-right National Rally party. Such meetings were once considered taboo, but now that the Rally looks like it could take the presidency in the 2027 elections, business leaders want to influence it. While far-right parties often support populist economic policies, the Rally’s engagement with business could potentially lead to further deregulation if it does take power.

Russia-Baltics: Officials from countries around the Baltic Sea have reported damage to undersea communications cables six times in the last six days, prompting fears that Russia has launched a new campaign of sabotage against the North Atlantic Treaty Organization. Such cable sabotage had stopped for most of the last year since NATO launched its “Baltic Sentry” program of enhanced naval patrols.

• If they really are attributed to Russia, the new attacks could reflect Kremlin efforts to scuttle the US-backed effort to reach a peace deal in Ukraine.
• In any case, the incidents serve as a reminder that pressure from Russia and the continuing Russia-Ukraine war are still important risks to the global investment environment.

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