Democratic Sweep Tests Trump-Linked Trades Across Latin America

Investors who spent the past year factoring countries’ standing with Donald Trump into their Latin America trades are confronting a new variable: a Democratic-controlled US Congress.

The fallout from the US midterms is adding a new twist for investors in nations that benefited from — or were pressured by — Trump’s foreign policy. That’s particularly true in Latin America, where the US president has pushed to exert more power and crowd out Chinese influence.

In the days following the US vote, Argentine debt lagged on concern the outcome could add to the challenges facing Trump ally Javier Milei as he seeks re-election. In Venezuela, where the US is at the center of political and economic transformation, investors are weighing whether the new political landscape could constrain his plans.

“It doesn’t take a rocket scientist to realize that this is not great for the very close friends,” says Hans Humes, Greylock Capital Management’s chief executive officer. “The moves that you see in the market are rational moves.”

The “friend-or-foe” gauge emerged as a key metric for portfolio managers in Trump’s second term, adding fuel to bond rallies from Argentina and Ecuador to El Salvador, where closer ties with the US bolstered the investment case. The trade gained further momentum after the US detained Venezuelan leader Nicolás Maduro in January. And while Trump retains significant scope to act without Congress, including through executive orders, the new setup could make it harder to provide the financial and political backing behind some of those trades.

Some of the steepest moves in the aftermath of the US midterm elections were seen in Argentina bonds. The notes, already under pressure amid growing worries about the government’s finances and Milei’s re-election prospects, dropped amid fears that a $20 billion US swap line forged last year to stave off a run on the currency could be pulled or neutralized under the new Congress, said Walter Stoeppelwerth, chief investment officer at local broker Grit Capital.

For Venezuela, the political shift comes as investors are already confronting delays in a debt sustainability analysis that is a key step toward restructuring tens of billions of dollars of defaulted bonds. The so-called DSA was initially expected for June, but has yet to be completed.

“There’s going to be more scrutiny on policy towards Venezuela,” said Katrina Butt, a portfolio manager at AllianceBernstein. “Would the Argentina swap line happen now? There would certainly be more pushback from Congress, but it was executed through an executive order.”

Few decisions about Venezuela’s economic and political future can now be made without Washington. The US has become the key power broker in the country’s transition while holding enormous leverage over its oil industry and foreign investment. Through the acting administration of Delcy Rodríguez, it has pushed crucial reforms and efforts for political opening after decades of socialist, authoritarian rule. And some of the Trump administration’s most consequential moves required no new legislation or Congressional backing — including the operation that seized and removed Maduro from Venezuela.

“Many of the interests are probably less about political allies and more about strategic interests in the region, such as critical minerals and energy, which will be sustained even with a blue sweep,” said Thomas Haugaard, a portfolio manager at Janus Henderson Investors in Copenhagen.

For Stoeppelwerth, the US commitment to Milei is unlikely to fade. His base case, “until proven otherwise,” is that Trump will double down on his own version of the Monroe Doctrine, the two-century-old principle that has long shaped US policy toward the Western Hemisphere.

Milei and other Trump allies in the region are facing challenges of their own. The Argentine leader’s popularity has suffered as his fiscal policies erode economic growth, weighing on his re-election prospects. Paraguay’s former President Santiago Peña was charged over his alleged role in the collapse of a major bank that set off widespread protests a day after he was removed from office by the Senate.

In Brazil, Flávio Bolsonaro lost the presidential election to leftist Luiz Inácio Lula da Silva. The eldest son of Jair Bolsonaro — the former President who once said he was ‘in love’ with Trump — has since fled to the US.

Trump to Push Overseas Agenda After Midterms Wipeout at HomeTrump Shelters Flávio Bolsonaro, Risking Tension With Brazil Bank Collapse Topples a President and Trump Ally in Paraguay

Taken together, the accumulating political risks may add friction to Latin America’s investment case.

“The US has done atypical financial interventions in select Latin American countries which cannot be relied upon going forward,” Samy Muaddi, head of emerging markets in T. Rowe’s fixed-income division. “Those relying on outside support are the ones most exposed.”

What to Watch

India, Poland, Argentina, Mexico, Colombia and Brazil release CPI dataChina’s price, trade and credit data are expected for the weekUS-mediated talks involving Russia and Ukraine are due to take place in Abu Dhabi