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Omicron Collides With Thin Liquidity to Ignite Market Selloff

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The omicron variant is causing widespread concern.

Monday’s Asian trading session had a decidedly risk-off tone, with US stock index futures falling, Treasuries rising, and risk-sensitive currencies falling as investors worried about more lockdowns to halt the new variant.

Senator Joe Manchin’s denial of the US spending package at the heart of President Joe Biden’s economic program added fuel to the flames, as market liquidity dwindles as Christmas approaches.

“It’s the spread of omicron over the festive holidays and Manchin,” said Wai Ho Leong, strategist at Modular Asset Management (Singapore) Pte. “But, above all, it’s a lack of liquidity in all markets.”

As of 1:55 p.m. in Tokyo, March contracts on the Nasdaq 100 were down 1.1 percent as investors fled risky assets. Bond prices rose, with 10-year Treasury rates falling three basis points to 1.37 percent.

The safe-haven yen rose versus every Group-of-10 currency, while gold rose.

Asian equities sank in tandem with US futures, with benchmark indexes in Japan, Hong Kong,, and Australia falling. The MSCI Asia Pacific Index fell as much as 1.7 percent to its lowest level in 13 months.

And the stampede for safe havens appears to have the capacity to expand.

Hedge funds have become the least pessimistic on the yen in nine months, with JPMorgan Asset Management predicting that demand for the currency will climb until the end of the year if virus fears persist.

Following Manchin’s decision to oppose the Biden administration’s roughly $2 trillion tax-and-spend plan, Goldman Sachs Group Inc. reduced its prediction for U.S. economic growth. Goldman has reduced its real GDP forecast for the first quarter to 2% from 3% earlier.

The backdrop of monetary-stimulus withdrawal in big economies is further complicating matters for developing-country assets.

According to Win Thin, global head of currency strategy at Brown Brothers Harriman & Co., the elimination of accommodating monetary policy by many major central banks “would hit developing markets hard,” as well as other risk assets that rely on copious liquidity. “As we approach into 2022, EM is expected to stay under pressure.”

Except for the yuan, every developing-market currency has depreciated versus the US dollar in the last six months. In terms of stocks, the MSCI Emerging Markets Index has fallen more than 7% this year, while the MSCI World Index has risen more than 16%.

In a high-volume session on Friday, the S& P 500 index extended its weekly decline. With the holidays quickly approaching, it could have been the final day of 2021 with sufficient liquidity for investors to trade in and out of significant positions.

“Unless we see this flow flip around, it seems like we could be at the discretion of position clearing rather than pursuing, and longs to get some off the table ahead of the calendar year-end,” Chris Weston, head of research at Pepperstone Financial Pty Ltd., wrote in a client note.

 

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Kathy Lewis

Kathy Lewis is an all-around geek who loves learning new stuff every day. With a background in computer science and a passion for writing, she loves writing for almost all the sections of Editorials99.

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