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How Afghanistan’s woes increase the level of risk even as global financial markets ignore chaos

By on August 23, 2021 0

Financial markets have been largely unresponsive to developments in Afghanistan, but the chaotic US exit from the country heightens underlying geopolitical risks and, some analysts say, potentially clouding the outlook for President Joe Biden’s legislative agenda.

“When it comes to the markets, there is still virtually no day-to-day relationship between US geopolitical risks and the stock markets” due to the situation in Afghanistan, said Mark Y. Rosenberg, CEO of GeoQuant , a research firm that analyzes geopolitical risk.

But the external risk of a terrorist attack or other major geopolitical incident has increased, according to measurements based on GeoQuant data.

“This increases the ever-present risk of a major terrorist attack on the United States,” Rosenberg said in a telephone interview.

Simply put, tail risk refers to the prospect of an event that is unlikely but that would trigger a significantly disproportionate movement in the financial markets. Some finance professionals define an extreme risk event as one that produces market movements of three standard deviations above the mean.

The Taliban had sheltered al-Qaeda before the terrorist organization’s attacks of September 11, 2001 against the United States. This caused the US invasion of Afghanistan and the overthrow of the Taliban. Reports said the Taliban freed al Qaeda fighters from jails as they took control of the country this month, according to the Wall Street Journal.

United Nations officials said al Qaeda operations were still present in some areas, the Journal reported, while U.S. intelligence assessments indicated the organization could reconstitute itself in Afghanistan 18 months to two years after an American withdrawal. US Secretary of State Antony Blinken said the ability of Al Qaeda operatives in Afghanistan to attack the United States has been reduced.

But would the risk picture have been any different if the US exit had been orderly, according to the Biden administration’s timetable? Rosenberg said that had the Afghan army been able to withstand the Taliban onslaught better, “it is reasonable to assume that these forces would have better controlled terrorist activity from Afghanistan.” So at the very least, the perception of that risk would have been blunted, ”he said.

Read: Will the Taliban takeover of Afghanistan tarnish the US dollar and other assets?

The Biden administration was discussing with its allies a possible extension of the August 31 deadline for withdrawing from Afghanistan as they attempt to evacuate thousands of people from the country, the Wall Street Journal reported.

Shares rose on Monday, with the Nasdaq Composite COMP,
+ 1.55%
by finishing at a record and at the Dow Jones Industrial Average DJIA,
+ 0.61%
and S&P 500 SPX,
+ 0.85%
recording solid gains. The dollar lost ground on Monday, but rallied last week, with the ICE US Dollar Index DXY,
-0.56%,
a measure of the currency against a basket of six major rivals, hitting a nine-month high last week.

While changes in perceptions of threats do not translate into daily movements in asset prices, some analysts argue that the political backlash in Afghanistan could have ramifications for the US economy and markets.

“It is unclear how the perceived incompetence of leaving Afghanistan may impact the bipartisan infrastructure bill and the social infrastructure bill this fall,” wrote Tavis McCourt, strategist in matter of institutional equity at Raymond James, in a Sunday note.

“The move will raise growth / inflation expectations, while a political defeat will create a new arrow in the quiver of those who bet on disappointment with growth in 2021/2022 and a rapid return to disinflation,” he said. -he writes.

The Senate voted 69-30 in favor of a $ 1,000 billion bipartisan infrastructure bill on August 10, followed by a procedural vote a day later for a $ 3.5 trillion package targeting social spending, climate change and other Democratic priorities, which was approved 50-49, according to party lines.

Capitol report: Biden’s agenda is put to the test this week as Pelosi, moderate Democrats deadlock

House Speaker Nancy Pelosi, D-Calif., Scheduled a procedural vote on Monday that would put in place the future passage of the two measures, as she worked to bring together nine moderate Democratic representatives calling for a stand-alone vote on the $ 1 trillion infrastructure bill before taking action on the bigger package.

Some commentators also see the fallout in Afghanistan increasing the likelihood that Biden will re-appoint Jerome Powell, a Republican, for a second term as Federal Reserve chairman. Speculation had grown that Biden, in a move that would please progressive Democrats, would instead appoint Fed Governor Lael Brainard to the post.

Economist Tim Duy, a prominent Fed observer, argued that Biden would now be reluctant to fight with Republicans in the Senate.

See: Afghanistan’s real importance to markets could be how it shaped the battle for Fed succession

GeoQuant’s Rosenberg said that while the chaos in Afghanistan would likely make Biden less eager to fight for the Fed chairmanship, Powell’s reappointment had already seemed likely.

Regarding the legislative program, the analyst argued that bipartisan support for infrastructure spending will not be affected by developments around Afghanistan, making the approval of some sort of package likely.

More importantly, the situation reinforces the historic trend towards anti-titular voting in the midterm elections, giving Republicans more ammunition in their attempt to regain control of Congress next year, he said.

Victor Reklaitis and Steve Goldstein contributed reporting.