Geopolitical flashpoints
The year has begun with heightened geopolitical activity, led by U.S. actions in Venezuela alongside renewed tensions involving Iran and Greenland. In Venezuela, the removal of President Nicolás Maduro and the possibility of U.S. involvement in rebuilding the country’s oil sector have revived expectations that production could rise over time. However, decades of underinvestment, infrastructure decay, corruption, and political instability suggest that any supply recovery would be slow, costly, and complex.
For Canada, the longer-term risk is competition from Venezuelan crude for U.S. refiners, which rely heavily on Canadian supply. That said, Canada benefits from an entrenched pipeline network into the U.S. and improved export optionality following the Trans Mountain Pipeline expansion to the west coast, both of which should help preserve market share. Canadian energy equities initially reacted negatively to developments in Venezuela, reflecting concerns that U.S. refiners could substitute Venezuelan barrels for Canadian crude, potentially widening the price spread between Canadian heavy oil and the benchmark—which would create a headwind for Canadian producers. This market response may be underappreciating the significant time and capital required to materially lift Venezuelan production, as well as Canada’s improved export infrastructure.
Elsewhere, the U.S. administration has warned Iran about civilian harm in the regime’s suppression of widespread domestic protests and reasserted its desire to “acquire” Greenland. While these events underscore persistent geopolitical uncertainty that may bring episodes of market volatility, the broader lesson from recent years has been the importance of maintaining perspective—avoiding overreaction to headlines and focusing instead on economic fundamentals and corporate earnings trends.
Central banks
In Canada, recent labour market data, notably the stabilization seen in trade-exposed sectors, could allow the Bank of Canada to remain patient. RBC Economics expects the labour market recovery to be uneven, and with inflation near target, the BoC has flexibility to assess macro developments. As a result, we expect the BoC’s benchmark rate to remain unchanged over the coming quarters.
Takeaway
While geopolitical developments and policy uncertainty may drive intermittent volatility, corporate earnings and underlying economic fundamentals remain the primary drivers of equity markets. These factors continue to look supportive in the quarters ahead. In our view, maintaining an “invested, but watchful” approach remains prudent.
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