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Omicron Fears Ignite Market Selloff Just as Traders Clear Books

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(Bloomberg) — Just as investors were wrapping up this year’s trading, the threat of new lockdowns sent shock waves through markets across the world.

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U.S. stock index futures fell, Treasuries gained and risk-sensitive currencies slid. European stocks fell the most in three weeks, led lower by travel shares.

Lockdown risks are rising as U.K. Health Secretary Sajid Javid refused to rule out stronger measures before Christmas after the nation’s top health advisers urged more restrictions to contain sharply rising coronavirus infections. The Netherlands said Saturday it’s going to a full lockdown until at least Jan. 14. Europe’s biggest countries also are weighing more curbs to fight a surge as well.

Volatility surged, with the Euro Stoxx 50 Volatility VSTOXX Index and the VIX Index both jumping to the highest in two weeks. S&P 500 e-mini futures were down as much as 1.8% while the Stoxx Europe 600 Index dropped 2.5% by 9:06 a.m. in London.

“Markets this week and next will be for day traders with steely nerves and deep pockets, not for trend followers,” Jeffrey Halley, senior market analyst at Oanda Asia Pacific Pte, said in a note. “As I have repeatedly said, the winner in December is V for volatility.”

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 starting to thin as Christmas nears.

Investors snapped up bonds with yields on 10-year U.S. Treasuries slipping as much as five basis points to a two-week low of 1.35%, while those on benchmark gilts tumbled the same amount to 0.71%. Currency traders too piled into havens, with the Japanese yen rallying against most of its Group-of-10 peers.

“The market is very jittery and obviously the news flow on omicron is not good,” said Charles Diebel, a money manager at Mediolanum. “But I’m not sure the impact will last too long. I think the combination of infections and boosters means this abates relatively quickly, ie by February, so I wouldn’t be buying bonds on the back of it.”

Asian stocks fell, with benchmark indexes down in Japan, China and Hong Kong, while India’s Sensex index looked poised to enter a correction. The MSCI Asia Pacific Index tumbled as much as 2% to trade at its lowest in 13 months amid lower volumes, with about 29 billion shares on the gauge traded Monday at the time of writing.

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. The Turkish lira, which has been under pressure after President Recep Erdogan flagged an economic model that relies on lower borrowing costs, slid to an all-time low on Monday.

In stocks, the MSCI Emerging Markets Index has slid more than 7% this year and was down 2% today, while the MSCI World Index is up about 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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