(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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Sentiment in stocks and bonds remained on the back foot, though U.S. stock index futures and 10-year Treasury yields pared declines after Moderna Inc. said a third dose of its Covid-19 vaccine increased antibody levels against the omicron variant.
Lockdown risks are rising, with the U.K. Health Secretary Sajid Javid refusing to rule out stronger measures before Christmas and the Netherlands said Saturday it’s going to a full lockdown until at least Jan. 14. Senator Joe Manchin’s rejection of the U.S. spending package at the heart of President Joe Biden’s economic agenda also weighed on sentiment.
“The market is lowering its expectations for growth due to omicron and lower liquidity as the year is ending is potentially amplifying the moves, so we have to be a bit careful of reading too much into the weakness,” said Peter Garnry, head of equity strategy at Saxo Bank.
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 fell 1.2% as of 8:01 a.m. in New York, after earlier sliding as much as 1.8%. The Stoxx Europe 600 Index trimmed earlier declines to 1.5%.
“I remain constructive for 2022, given a health situation that seems under control, with admittedly high transmissibility but mild symptoms; an environment of interest rates increasing but nonetheless contained, as well as an inflation that seems under control,” said Michel Keusch, a portfolio manager at Bellevue Asset Management. “I would not sell in this environment.”
Yields on 10-year Treasuries traded at 1.38%, paring declines to two basis points. Risk-sensitive currencies underperformed, with the New Zealand and Canadian dollars leading losses in the Group of 10.
“The selloff is influenced by year-end volatility and new fears on growth due to the omicron variant,” said Antonio Amendola, a portfolio manager at AcomeA Sgr. “That said, we need to remain selective on stories with greater solidity and ability to preserve margins in inflationary contexts. At the relative level, small and mid caps are better than large caps.”
Morgan Stanley strategists led by Michael Wilson recommended that U.S. stock investors stay defensive, and while omicron adds to economic concerns, they’re more focused on risks of supply picking up while consumption fades.
“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, i.e. by February, so I wouldn’t be buying bonds on the back of it.”
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 1.9% today.
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.
(Updates prices throughout.)
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