Markets and the Talion law, expectations for the Indian elections, and the depreciation of the renminbi still ‘under control’

  • Is the Talion law driving markets? The conflict in the Middle East is fueling market pessimism, a flight-to-safety, and a shortened investment horizon visible in “W-shaped” market volatility patterns. Indeed, investors seem to continuously adjust to the shifts between geopolitical escalation and relaxation, or a form of Talion law – the “eye for an eye” principle. Current oil prices, at USD90, appear to include a geopolitical risk premium of USD5 to USD10. It also appears that the current geopolitical scenario is likely to prompt a slightly dovish stance from central banks. Significant intraday volatility in equity markets, influenced by technical and fundamental factors, will likely amplify short-term market volatility, regardless of the news source (be it political, geopolitical, or financial earnings).
  • Indian elections: continuity is critical. India will conduct parliamentary elections from 19 April to 1 June, with results expected on 4 June. Narendra Modi is poised for a third term with his Bharatiya Janata Party leading the coalition government. The continuation of reforms should focus on regulations, infrastructure, the labor market and the manufacturing sector to sustain fast-paced growth and position India as a prime destination for foreign investment. The government aims to elevate India’s infrastructure and trade logistics to rank among the world’s top 25 countries by 2030. India could become the second-largest economy in the Asia-Pacific region and the third-largest globally by 2030, yet downside risks remain.
  • PBOC’s strategy to control the depreciation of the renminbi. Despite global pressure, notably from strong US data, the onshore Chinese yuan (CNY) has shown remarkable stability, with a slight depreciation of just -0.1% this month. The People’s Bank of China (PBOC) aims to contain this pressure, likely accepting modest, controlled depreciation but keeping the USDCNY onshore rate below 7.34. Policy measures to support the economy such one more cut in both the reserve requirement ratio and the one-year loan prime rate can still be anticipated, although implementation may be delayed. The controlled depreciation of the renminbi could benefit other Asia-Pacific currencies strongly correlated to the renminbi.
Ludovic Subran
Allianz SE
Jordi Basco Carrera
Allianz SE
Francoise Huang
Allianz Trade