Afghanistan Turmoil Adds to Political Risks Facing Markets

Traders work on the floor of the New York Stock Exchange.  (Photographer: Michael Nagle/Bloomberg)

Afghanistan Turmoil Adds to Political Risks Facing Markets

Investors are adding the evolving situation in Afghanistan to their list of global issues to monitor.

Strategists don’t expect an immediate market impact after the Taliban took effective control of Afghanistan, but instead flagged longer-term scenarios, such as the possibility the nation could become a breeding ground again for international terror attacks.

The militant group’s rapid advance in the vacuum left by departing U.S. and NATO forces is also putting pressure on President Joe Biden, who just last month said there was a low chance of the Taliban overrunning the country. Alarm about the situation is growing in Congress, where Biden already faces obstacles from some lawmakers to enacting his more than $4 trillion economic agenda.

Stocks slid Monday while the dollar rose on concerns that the delta virus variant is slowing the recovery from the pandemic, with the latest bout of geopolitical tension adding to the cautious mood.

Here is a roundup of comments from strategists.

Superpower Question

The unraveling in Afghanistan poses questions about the U.S. and its role in the world, according to Louis-Vincent Gave, chief executive officer with Gavekal Capital. If it’s like the 1956 “Suez moment” -- a reference to the crisis that marked Great Britain’s decline as a global power -- there could be far-reaching implications, he wrote in a note.

If the days of the single-superpower world are over then the fall of Kabul will be “bearish for the U.S. dollar and the U.S. Treasury market, and bearish for the countries ‘free-riding’ under the U.S. security umbrella. Conversely, it will be bullish for the renminbi and the renminbi bond market, as China is the rising power in Asia. It will be bullish for the ruble and Russia’s bond market. It will be bullish for oil, given the chance of heightened tensions in the Middle East. And it will be bullish for gold, the ultimate antifragile asset at times of geostrategic strife.”

Pressure on Biden

“It may be a loss of face for President Biden but then again Trump was going down the same path,” said Shane Oliver, head of investment strategy and chief economist at AMP Capital. “This increases pressure for Biden to get as much of his spending program passed into law” to help take the focus away from Afghanistan.

Domestic Politics

The underlying question in Afghanistan is one of poor execution and what it reveals about a flawed process of decision-making in the White House, according to Sebastien Galy, senior macro strategist at Nordea Investment Funds. At the same time, “Democrats will still coalesce around the president so that this should not be an issue for domestic politics,” he said.

Terrorism Concern

Afghanistan’s connections to broader markets is fairly small, said Ilya Spivak, head of greater Asia with DailyFX. “Where it gets impactful is if the area becomes a staging ground for terrorism again,” he said. Investors are likely to be hesitant to trade too heavily into that theme “unless something happens” in that regard, Spivak added.

Limited Presence

The limited presence of global companies in Afghanistan necessarily constrains its wider impact on markets, said Jeffrey Halley, senior market analyst at Oanda Asia Pacific Pte. “I seriously doubt that any major companies have any operations of scale there,” he said. “Sadly, Afghanistan’s biggest export will be people fleeing.”

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