Geopolitical Developments: The Horrors in Afghanistan Redound to Russia’s Favor and Europe’s Disfavor More Than To Biden

The scenes from Kabul are anguishing but create no trends affecting US financial markets. The volatility risk premium points to a higher market over the next few days (though volume may be light since the VRP could easily reverse and catch investors offside), while my technical reading of key stocks in the S&P 500 is bullish. Yesterday's cross-asset action brought one positive factor for US stocks. The US yield curve is falling and in the current context that is bullish. Expect the S&P 500 to rise modestly over the next few days.

Biden’s Saigon moment in Kabul has only one consequence for US financial markets: Kim Jong Un’s eventual reaction to the visceral drop in American global prestige. Since KJU is often erratic and information from the DPRK is sparse, the market isn’t reacting to the notion that KJU will exploit the situation, but simply weighing a heavier than normal brick in the wall of worry it climbs, which limits the upside. The more predictable geopolitical consequences and the extent of human suffering caused by the Taliban’s surge are simply not bearish for US markets, since the Afghanis will either migrate across Eurasia or bear the suffering at home, and the vitiation in US foreign policy is largely irrelevant to large US firms’ profits since these firms are diversified. The sad state of EU politics coupled with the vulnerability of both Xi and Putin to a drop in global growth means the major adversaries to the US have no incentive to meaningfully harm US interests, but rather to exploit European fissures.

And Europe is a primary loser since the regional consequences benefit Russia more than anyone. Pakistan’s ISI has triumphed over the US, but that means Pakistan will need to limit any fallout from the US by broadening its ties with Russia, who would gain from deeper ties as well since Pakistan could influence the Taliban in Russia’s favor. Deeper Pakistan-Russia ties also improve Pakistan’s position vis-a-vis India and simultaneously levels its playing field with its key economic benefactors China & the GCC.

The Washington Post notes that following 9/11 “the Pakistani Taliban — closely allied with their Afghan counterparts — waged an insurgency against the Pakistani government that devastated entire regions and took thousands of lives…Many experts suspect that the Taliban, which still draws primarily on Pashtun support, might begin to question the legitimacy of the border now that it is in power.”

And he Financial Times reports “The likely exodus of refugees from Afghanistan could strain the finances of neighbouring countries, fund managers said, while there was also concern over the potential for western retaliation against Pakistan for providing a safe haven for the Taliban... Even prior to the recent sell-off, Pakistan already had some of the highest bond yields among emerging economies that are not considered to be at immediate risk of default. Its debt is rated B minus by Standard & Poor’s and by Fitch, six notches into junk territory.”

So unless the Pakistani Rupee breaks 168 the civilian-military co-government of Imran Khan and “The Generals” will ride out the near-term issues and strengthen ties with Russia in order to become a more prominent player in the Eurasian block of illiberal states.

For Europe the negative prospect of stronger Putin is matched only by fears of another migration wave. The Arab Weekly notes “Many Afghan refugees could seek refuge in Europe…following an earlier influx of migrants, mostly fleeing war or persecution in Syria, other Middle Eastern countries and Afghanistan…If the refugees travel via Turkey, he said, they could help Turkish President Tayyip Erdogan make political or financial demands of the European Union.”

This could broaden into a larger migration wave given that tensions are already high in middle East/Central Asian region, in particular the other country where the US is ostensibly pulling out: Iraq. Recently an associate of the courageous and liberal Shia cleric Sistani, a man named Sheikh Hamid al-Yassiri , implicitly criticized Iran for its influence in Iraq, according to The New Arab. And as DW notes: “Tensions rise as Iranian dams cut off Iraqi water supplies.”

My current market positions are in Facebook (FB), Korn-Ferry (KFY), MKS Instruments (MKSI), Starbucks (SBUX), Titan Machinery (TITN), and nearly hedged position that is net long in the SPX (UPRO and SPXU).