The Taliban’s conquest of Afghanistan has little direct significance for global financial markets currently. However, the U.S. withdrawal connects with other geopolitical and domestic currents that could have both macro and market significance at some point.

The recent events that have unfolded in Afghanistan have little current macroeconomic significance, but the geopolitical changes underway are noteworthy.

Afghanistan is capturing the world’s attention. The Taliban has conquered most of Afghanistan, while U.S. armed forces are evacuating embassy staff and civilians. The chaotic scenes have invited comparisons to the U.S.’s flight from Saigon, Vietnam, in 1975. The situation in Afghanistan is startling, and further adds to the geopolitical challenges the U.S. is contending with.

Asia, Middle East relations still priorities

The U.S. has been trying to disentangle itself from wars, or at least its large military presence in the Middle East, for years. Meanwhile, Washington is primarily refocusing its attention on its rivalry with China—the only country on a path that makes it capable of supplanting the U.S. as a global hegemon.

The U.S. has long struggled to conduct this “pivot to Asia.” While trying to manage its strategic interests in the Middle East, the U.S. has not been fully engaged in shoring up its economic and military presence in the Asia Pacific. Even if this shift is successful, the Middle East could still play a critical role in geopolitics, particularly for its energy production.

A major risk that remains in the Middle East is Iran. President Biden was not able to rejoin the 2015 détente with Iran prior to the inauguration of the new president, Ebrahim Raisi, whose policies could lead to an escalation of Middle Eastern geopolitical risk. Certainly, both the U.S. and Iran have strategic mutual interests for them to conclude a deal. The U.S. wants to pivot to Asia, while Iran needs to improve its economy and reduce social unrest. The uncertain timeframe for negotiations leaves a vacuum for something to go awry. Any failure to agree would revive the risk of a confrontation that would keep the U.S. entangled in the region. Thus, the pivot to Asia could be postponed again, with open consequences for global politics.

These potential circumstances pose a not-to-be-overlooked domestic risk to the Biden agenda. The president’s legislative efforts could be derailed if his approval rating sinks and Democrats move away from supporting the proposed spending bills for fear their support reflects poorly on their record in advance of the elections next year. A failure of Biden’s bills would create a rather steep fiscal cliff next year and financial markets may discount a slower rate of economic growth than otherwise anticipated in the absence of further stimulus.

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About the author

Mark Luschini

Chief Investment Strategist, President and Chief Investment Officer, Janney Capital Management

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