Venezuela Not a Factor for Equities

STOCK INDEX FUTURES

The indexes are higher, shrugging off the events in Venezuela over the weekend suggesting that economic data out of the US this week will be playing a larger role in price direction than geopolitics. A lack of further escalation, alongside the decisiveness of the operation present minimal opportunities for a spillover in conflict and seem to present minimal downside risks in regard to geopolitics. The energy sector is higher in premarket trading as  President Trump floated plans for a US-led revival of Venezuela’s oil industry. However, the actuality of an immediate boost in oil production is negligible, while long-term US investment remains subject to regime developments. Chevron jumped nearly 7%, Exxon Mobil gained almost 4%, and ConocoPhillips surged 6%. Semiconductor stocks also moved higher, with Nvidia up 1.5%, Broadcom adding 1.3%, AMD rising 2.9%, and Micron Technology gaining 3.6%. Traders are looking ahead to a busy week of US economic data, highlighted by the December jobs report due Friday. ISM Manufacturing data will come out later in the morning and is expected to show that US manufacturing activity remains in contractionary levels, while service PMI data will be out on Wednesday.

CURRENCY FUTURES

US DOLLAR: The dollar held overnight strength, gaining strongly against the euro and Mexican peso, as traders largely shrugged off the Venezuela impact ahead of key economic data out of the US this week, suggesting that the economic calendar will be more decisive in determining dollar direction than geopolitical headlines. December nonfarm payrolls report will come Friday and offer a solid assessment over the labor market in a report which should be free from any shutdown related impacts, giving markets a clear look into the health of the labor market. ISM Manufacturing PMI data will be out earlier in the morning and could be a move for the dollar. Traders will look to assess the prices index and surveys on how businesses continue to deal with the impact of tariffs for any leading indicator on inflation. JOLTS data this week will also be important for determining the timing of a future rate cut out of the Fed. Currently, markets are pricing a 15% chance of a rate cut at the January meeting, with a rate cut not fully priced in until the June meeting.

EURO: The euro fell with little data out of the trade bloc today, as traders await inflation data for France and Germany on Tuesday, followed by Italy and the eurozone as a whole on Wednesday. Travel-related service costs are expected to lift the eurozone headline figure slightly, but the data is unlikely to shape opinions at the European Central Bank for any near-term moves on monetary policy. The ECB is likely to stay on hold for 2026 and most of 2027 as inflation is forecast to hover around the bank’s 2% target, while recent growth projections have been revised higher. Manufacturing data out of Germany will also serve as a notable event for currency markets, as traders continue to assess the impact of higher US tariffs on the eurozone and more specifically, export-reliant Germany. Data out of the US this week will also  be important for moves in the euro given the interest rate divergence potential between the two central banks.

BRITISH POUND: The pound is lower against the dollar as traders await key data out of the US this week in what is to be a relatively quiet week for the sterling. Consumer credit and mortgage lending data for November, which showed an mortgage approvals fell less than expected and an increase in consumer borrowing, came out earlier in the morning and did little to move the currency suggesting that traders will be focusing on data out of the US for moves in the sterling. The Bank of England lowered rates by 25 bps last month and is expected to deliver one more rate cut this year, although officials at the bank cautioned that the pace of easing could slow as the bank does not want to jump the gun on inflation. The recent rate cut brough a tight 5-4 vote, with BoE Governor Andrew Bailey offering the tie-breaking vote.  Money markets suggest the next rate cut could come in April or June, with the later meeting being fully priced in for a cut.

JAPANESE YEN: The yen fell against the dollar, with the currency heading closer to the 157 level and no move from the Japanese government to intervene in currency market over holiday period, a move some analysts had been expecting. The Bank of Japan’s branch managers’ meeting will take place on Thursday, which will see the central bank release its regional economic report, similar to the Fed’s beige book. BoJ Governor Ueda reiterated that the bank will continue to raise rates if economic projections are met, language that he has used in the past that is largely being shrugged off by traders. However, there is growing confidence that Japan is in a good place to move into a more sustainable, growth driven economy, but those hopes have done little to support the currency. The cabinet recently approved a 122.3 trillion yen budget, which aims to balance aggressive fiscal spending and debt management by curbing new bond issuance. However, Japan’s public debt is twice the size of the country’s economy, giving the government limited flexibility to implement further stimulus measures. These dynamics continue to present downside pressure against the currency, expectations that the BoJ will raise rates slower and more cautiously than expected has disappointed removed some near-term strength.

AUSTRALIAN DOLLAR: The Aussie dropped against the dollar ahead of a November CPI inflation report, which will be watched for signs on inflation pressures in the country as traders speculate the Reserve Bank of Australia’s next move. The RBA recently warned that inflation risks in the economy appear to be tilted to the upside and traders have been speculating that the next move from the central bank is likely to be a raise in rates. Still, the central bank sees the monthly inflation figures as volatile and places greater emphasis on its quarterly inflation report, which is due in late January. A stronger-than-expected Q4 core inflation print is likely to support the case for a rate hike at the central bank’s March or May meeting, with market odds fully pricing in a rate hike at the later. Building approvals data and some trade data for November are also due for release this week, which could offer some signals on economic momentum in the country. Recent figures showed that Australia’s economy grew 0.4% in the third quarter, up 2.1% from a year earlier.

INTEREST RATE MARKET FUTURES

Yields are lower at the front end and higher at the long end as traders largely shrug off any impact from the developments in Venezuela over the weekend. A lack of spillover and further escalation alongside the decisiveness of the US operation seem to present minimal downside risks in regard to geopolitics. ISM Manufacturing data will be out later in the morning and serve as an update on the health of the US manufacturing sector, which has remained in contractionary territory for quite a while. Attention should be paid to the prices index for an indicator on how tariffs continue to impact prices for companies. Recent data and PMI surveys have suggested that price pressures are declining, although November’s CPI inflation report did little to reassure that trend given the downward bias of the data collection efforts. December’s nonfarm payroll report will offer the first set of data on the labor market that has not been affected by the shutdown and will offer a snapshot into how the labor is performing. Fed Funds futures are favorable to a rate cut from the Fed in April, followed by another reduction in July or August, while the Fed’s latest dot plot suggests that policymakers expect just one cut in 2026. The dot plot showed that policymakers are almost evenly split on how monetary policy should precede in 2026, but President Trump’s Fed nominee is expected to support further easing in the economy. The president said he would be announcing his nominee for the Fed in January, so markets will continue to keep an ear open for the announcement.

The spread between the two- and 10-year yields is 71.20 bps, its highest level since early 2022, while the two-year yield, which reflects short-term interest rate expectations, is 3.469%.

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