The new year has begun with a jolt for market participants after the US carried out a military operation in Caracas over the weekend, capturing Venezuela’s president Nicolas Maduro and his wife. The situation remains unpredictable, not least because it is not 100% clear who will be physically running the country in the next few days, though the current assumption seems to be that the vice president, Delcy Rodriguez, will be in charge as long as she agrees to behave in line with the US administration’s guidelines.
Market reaction has so far been muted. Venezuela is a small country from a GDP point of view, and its relevance in the oil markets has diminished as the country’s infrastructure is severely underinvested and US sanctions have reduced exports. There are a few important points to make for the medium term though.
Most importantly in our view, the National Security Strategy the US administration published last November is to be taken seriously. There is a focus on the Western hemisphere where the US will seek to “reassert and enforce the Monroe Doctrine to restore American pre-eminence.” The report also states the US “will deny non-Hemispheric competitors the ability to position forces or other threatening capabilities, or to own or control strategically vital assets, in our Hemisphere.” Given Maduro’s commercial and ideological ties with Russia and China, we now have concrete evidence of how exactly President Trump might seek to achieve the National Security Strategy goals in this regard.
When it comes to Europe, the report recognises the continent as an ally and acknowledges the importance of transatlantic trade, but there are clear reservations on the trajectory of both the economy and national identities. Greenland is not mentioned specifically in the report but nervousness about what Trump might or might not do has certainly increased after what happened in Venezuela; the Danish prime minister was sufficiently moved to call on Trump to stop threatening to seize the autonomous territory on Sunday. The report is also quite explicit when discussing Taiwan and the relevance of deterring a conflict that changes the status quo. It highlights Taiwan’s importance to semiconductor production but also geographically as the island “provides direct access to the Second Island Chain and splits Northeast and Southeast Asia into two distinct theatres.” The section on Taiwan concludes by saying that the US “will also maintain our longstanding declaratory policy on Taiwan, meaning that the United States does not support any unilateral change to the status quo in the Taiwan Strait.”
It remains to be seen how the events in Venezuela could impact the resolution of Russia’s invasion of Ukraine, and the likelihood of Beijing deciding to make a move on Taiwan. While there is a clear case for Russia and China to feel emboldened to pursue their geopolitical agendas using military force, there is also a case for caution as the Trump administration has shown is not shy about using military intervention when it suits its objectives. Taiwan in particular seems to be more important to the US than Ukraine – judging by the report.
Oil prices will be interesting to watch as one Trump objective is for US oil companies to invest in Venezuelan oil. The country has the largest proven reserves in the world, but billions of dollars are needed to upgrade the infrastructure, and it will take time. We could nevertheless see something of a ceiling on oil prices emerge if headlines in coming quarters are that these investments are materialising.
From a fixed income portfolio point of view, the weekend’s events are not significant enough in isolation to change our views significantly, and this is reflected in the muted market reaction we have witnessed so far. The big question however is whether this stops here. Will we see Trump’s threats to annex Greenland ramp up? Will Cuba follow? Will Russian and Chinese investments in the Western hemisphere come under threat? Will President Putin feel he’s got more leverage in negotiations to end his invasion? Will China toughen its rhetoric on Taiwan? While all these events sound like they would prompt risk-off moves, their inflationary implications mean the extent to which government bonds might serve as a hedge is not obvious. If the supply of semiconductors out of Taiwan were to be reduced, for example, it could have severe consequences for inflation.
For the time being we continue to believe credit exposures should be focused on safer parts of the market, duration should be moderate, and portfolios should be liquid to change exposures quickly if needed as geopolitical risks are not going away. Instead, they have just increased, and they could have a big bearing on investment outcomes in 2026.
