Who cares about the numbers? Today, it's geopolitics...
ref :- "Pakistan bonds knocked as investors fear fallout from Afghanistan debacle", the Financial Times, Companies and Markets
ref :- "Afghanistan and the future of rates" in "Unhedged" newsletter, The Financial Times
If this was just a "normal" day, or if we were so myopic in our attention to markets that world events that didn't immediately affect the P&L just passed us by, we'd no doubt be mulling over some pretty ropey data released by the world's two biggest economies. But it's not... and we're not, or at least we'd like to think that was the case. It's true that disappointing numbers for China's Industrial Production, Retail Sales and Investment Activity, and tumbling Consumer Confidence in the US, are a concern... but today has to be about Afghanistan.
Sad, tragic Afghanistan. We'll get to how the two pieces in the FT treat some of the market implications of events in a moment... well, that's what we do even if it's sometimes pretty distasteful to focus on dollars and cents in the light of unfurling calamity. It's not really our job to pontificate about geopolitics, except with regard to how they may affect economies and markets. So while some might question the timing and handling of the US withdrawal, in the same way we suppose as some may question the original decision to be there in the first place, we will restrict ourselves to just one observation.
In response to the US administration's admission of surprise at the speed of the collapse of the Afghan government and armed forces, we would say: "We are surprised that you are surprised". What did they really expect of a government structure riddled with corruption and incompetence? Self-sacrifice and unswerving defence of high-minded ideals? Or of an army trained to fight alongside US support, particularly from the air, that was no longer there?
There's a serious point here... President Biden has sold himself as a safe pair of hands when it comes to international affairs. One could make a fair argument that his voting record doesn't stand up to much scrutiny and that anyone might seem safe in comparison to his predecessor as President, but a majority of Americans supported the evacuation plan. Who knows, it may well be that a majority will still back his actions once the dust settles a little, despite the humiliating parallels to Saigon 1975. But without any question, very serious miscalculations were made and that damages both confidence in this administration's abilities on a global stage and faith in its good intentions. The saga plays into the hands of the US' competitors (in this case China, Russia, Iran etc.), and THAT has considerable longer-term ramifications in matters both geopolitical and otherwise.
Anyway, back to more mundane issues...
The first FT article concentrates on how Pakistan's international bonds reacted to events across the border in Afghanistan... very badly, nobody will be surprised to hear. It would seem only reasonable to expect a new tide of refugees fleeing the Taliban which will stretch the finances of already cash-strapped neighbouring countries. Markets in Uzbekistan and Tajikistan are already feeling the selling pressure. On top of which, Pakistan may also suffer some retaliation from the US and other western allies for its role in harbouring and protecting the Taliban for so long.
The "Unhedged" newsletter however, or at least the first part of a comprehensive missive today that covers a number of topics, has a different slant on things. Actually, author Robert Armstrong's eye-catching intro was more general in nature. He tells us that it's pretty standard for journalists and commentators to ponder why the stock market is seldom damaged too much by US policy errors, either domestic or international. But he looks at things in a different way. It's a surprise to him that US stocks aren't even stronger when America fouls up, either at home (stand-offs over the budget, say... like the one maybe soon to come), or foreign (mis)adventures that end in dishonour and instability (like the one we've just seen). His logic: "When America makes mistakes, the world becomes more dangerous... and when the world is more dangerous, the place to be is American assets."
Mmm... interesting, and not entirely mad.
But Mr Armstrong quotes Ed Al-Hussainy of Columbia Threadneedle, who can foresee both a long-term and a short-term effect of the Afghan debacle. In the short-term, and with regard to Pakistan's bonds, he can see the move lower as a buying opportunity. Pakistan is in negotiation with the IMF over its $6bn aid package... but recent events mean that the IMF, ultimately a political animal, is far more likely to support a stable Pakistan and thus improve the credit outlook for its bonds.
The longer-term effect revolves around US, and therefore global, rates. President Biden has come to embody what many thought was becoming the new fiscal norm... which is to say, "all this fiscal support would become the normal response to recessions and higher spending between recessions would become standard...". Such spending would inevitably over time result in higher rates. But if the President's political capital has been damaged he'll find it much more difficult to drum up support for both near-term stimulus in the face of growing fears of inflation, or for longer-term infrastructure spending that may already lack enough backers.
In other words, "if you had an optimistic case for higher rates, you have to temper that optimism now."