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Market Further: How the issues in Afghanistan enhance the extent of threat, regardless of the worldwide monetary markets ignoring the chaos

Financial markets were largely unaffected by developments in Afghanistan, but the chaotic US exit from the country increases underlying geopolitical risks and, according to some analysts, may cloud the outlook for President Joe Biden's legislative agenda.

"When it comes to the markets, there is basically still no day-to-day relationship between US geopolitical risks and the equity markets because of the situation in Afghanistan," said Mark Y. Rosenberg, chief executive officer of GeoQuant, a research firm Analyzes risks.

But the external risk of a terrorist attack or other major geopolitical incident has increased, according to GeoQuant's data-based metrics.

"It increases the ubiquitous fat-tail risk of a major terrorist attack on the United States," Rosenberg said in a telephone interview.

Put simply, tail risk refers to the prospect of an event that is unlikely but would trigger a significantly oversized move in financial markets. Some financial experts define a tail risk event as an event that produces market movements that are three standard deviations above the mean.

But would the risk picture be different if the US exit were orderly and in line with the Biden administration's schedule? Rosenberg said that if the Afghan army had been able to better withstand the Taliban's attack, “it is reasonable to assume that these forces would have been better at controlling terrorist activities from Afghanistan. At least the perception of that risk would have been blunted, ”he said.

Read: Will the Taliban's takeover of Afghanistan weigh on the US dollar and other assets?

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

Stocks rose on the Nasdaq Composite on Monday
COMP,
+ 1.55%
Finished with a record and the Dow Jones Industrial Average
DJIA,
+ 0.61%
and S&P 500
SPX,
+ 0.85%
Log solid profits. The dollar lost ground on Monday but rebounded last week on the ICE U.S. Dollar index
DXY,
-0.56%,
a measure of the currency against a basket of six major rivals that hit a nine-month high last week.

While changes in threat perception are not reflected in daily asset price movements, some analysts contend that a political setback from the situation in Afghanistan could have repercussions for the US economy and markets.

"It is unclear how the perceived incompetence of the exit from Afghanistan could affect the bipartisan infrastructure bill and social infrastructure bill this fall," Tavis McCourt, institutional justice strategist at Raymond James, wrote on a Sunday note.

"Passage will raise expectations for growth / inflation, while political defeat will put another arrow in the quiver of those who bet on growth disappointment and a quick return to disinflation in 2021/2022," he wrote.

The Senate voted 69-30 in favor of a bipartisan infrastructure bill of $ 1 trillion on Aug. 10, followed by a procedural vote a day later for a $ 3.5 trillion package on social spending, climate change and other democratic Priorities, which was adopted 50 to 49, along party lines.

Capitol Report: Biden's agenda faces a test this week as Pelosi, moderate Democrats in stalemate

House Speaker Nancy Pelosi, D-California, was slated for a procedural vote Monday that would determine the future passage of both measures as she worked to bind nine moderate Democratic officials who would have a standalone vote on the Infrastructure Bill at Jan. Trillion dollars were called for before action was taken on the larger package.

Some commentators also see the aftermath of Afghanistan increasing the likelihood that Biden will reappoint Jerome Powell, a Republican, for a second term as chairman of the Federal Reserve. There has been speculation that in a move that would please progressive Democrats, Biden would nominate Fed Governor Lael Brainard for the post instead.

Economist Tim Duy, a prominent Fed observer, has argued that Biden would now hesitate to enter a fight with the Senate Republicans.

See: The real importance of Afghanistan to the markets may be how it shaped the Fed succession struggle

GeoQuant's Rosenberg said the chaos in Afghanistan would likely make Biden less eager to fight for the Fed chairmanship, but Powell's reappointment looked likely.

On the legislative agenda, the analyst argued that bipartisan support for infrastructure spending will not be affected by developments in Afghanistan, making it likely that some type of package will find approval.

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

Victor Reklaitis and Steve Goldstein contributed to the coverage.

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