Omicron Collides With Thin Liquidity to Ignite Market Selloff

(Bloomberg) — Anxiety around the omicron variant is spreading.

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Monday’s Asia trading session took on a decisively risk-off tone: U.S. stock index futures fell, Treasuries gained, and risk-sensitive currencies slid as investors fretted over fresh lockdowns to slow the new variant.

Senator Joe Manchin’s rejection of the U.S. spending package at the heart of President Joe Biden’s economic agenda heaped fresh fuel to the fire with market liquidity thinning as Christmas nears.

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

March contracts on the Nasdaq 100 slid 1.1% as of 1:55 p.m. in Tokyo as investors ditched risk-sensitive assets. Bonds gained, with 10-year U.S. Treasury yields slipping three basis points to 1.37%.

The safe-haven yen advanced against every Group-of-10 currency, and gold climbed.

Asian stocks fell alongside U.S. futures, with benchmark indexes down in Japan, Hong Kong and Australia. The MSCI Asia Pacific Index tumbled as much as 1.7% to trade at its lowest in 13 months.

And the rush for havens looks to have room to run.

Hedge funds have become the least bearish on the yen in nine months, with JPMorgan Asset Management noting demand for the currency could rise into the year’s end if virus concerns mount.

Goldman Sachs Group Inc. cut its forecast for U.S. economic growth in the wake of Manchin’s move against the Biden administration’s roughly $2 trillion tax-and-spend program. Goldman slashed its real gross domestic product projection for the first quarter to 2% from 3% previously.

The backdrop of monetary-stimulus tapering in major economies is also adding to trouble for developing-nation assets.

The removal of accommodative monetary policy by many major central banks “will hit emerging-markets hard”, along with other risk assets that are dependent on plentiful liquidity, according to Win Thin, global head of currency strategy at Brown Brothers Harriman & Co. “EM is likely to remain under pressure as we move into 2022.”

Every developing-market currency except the yuan has weakened against the greenback over the past six months. In stocks, the MSCI Emerging Markets Index has slid more than 7% this year while the MSCI World Index is up more than 16%.

On Friday, the S&P 500 gauge extended its weekly slide in a session of heavy trading volume. With the holidays fast approaching, it could have been the last day of 2021 with enough liquidity for investors to trade in and out of large positions.

“Unless we see this flow turn around then it feels like we could be at the mercy of position squaring, rather than chasing, and longs taking some off the table ahead of the calendar year-end,” Chris Weston, head of research with Pepperstone Financial Pty Ltd., wrote in a note to clients.

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