Tide has turned

Sometimes, you may need a bit of time to grasp an economic or geopolitical event’s importance in your limited time on this lovely planet. Less than a quarter of a century ago, Afghanistan rose to a promising country with the reforms made by the government, supported financially and militarily by the West. However, after the withdrawal of the U.S. troops, the Taliban rampaged over the country in a ‘blitzkrieg” mode and gained control of most of the country, including the capital, Kabul, in less than a month. All the media outlets are full of footage from the chaotic scenes at Kabul’s airport as foreign powers seek to get their citizens home. Also, horse-trading has already started about the number of the refugees to be hosted. The shameful events will create new fault lines between the country and the West and soon export Taliban-supported ‘terrorist’ events. “After 20 years in Afghanistan, the West has only created a new haven for radicalization,” as Evgeny Lebedev, publisher of the Evening Standard and the Independent, wrote in his latest column. “When Saigon fell, the war was over. The fall of Kabul risks only renewing further bloodshed on the streets of our towns and cities by not merely providing militant Islam with a new haven but also by giving it a new potent recruitment call.” Yes, the tide has turned, and in the coming months and years, the world will learn the actual cost of the loss in Afghanistan.


Government bond yields are very low despite rising debt levels, almost as if fiscal risk premia are a thing of the past and don’t matter. But that picture is deceptive because markets continue to price fiscal risk, with the cross-section of Eurozone countries the most compelling example. Highly indebted countries like Italy and Greece have higher yields than others, and the correlation of yield levels with general government gross debt has risen. We examine the role that foreign in- and out-flows play as drivers of bond yields. During the COVID shock, Italy and Greece saw foreign investors sell their bonds, which is hard to reconcile with the idea that ECB QE boosts fiscal space. Unless we get QE infinity, fiscal space remains in the hands of markets.

-Robin Brooks, economist, IIF, August 19


We don’t expect emerging market equities, as a whole, to rack up significant gains over the next few years, thanks in part to the spillovers of lower growth in China. The latest tumble in EM equities, following the tapering discussion in the latest FOMC minutes, adds to what has been a relatively poor year for them so far. The MSCI EM Index is slightly lower than where it began the year; by contrast, the MSCI World Index of developed market equities has gained nearly 15% over the same period, despite the latest selloff. We think developments in China are a key driver of EM equities’ poor performance lately. For one, the country’s economic growth has slowed by more than many expected, which we suspect helps explain why its stock market has lagged those elsewhere after its world-beating performance last year.

-Thomas Matthews, economist, Capital Economics, August 19

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