Omicron Fears Ignite Market Selloff Just As Traders Clear Books

Volatility Spikes

Volatility increased, with the Euro Stoxx 50 Volatility VSTOXX and the VIX Indexes both reaching new highs during December.

S&P 500 e-mini futures were down 1.2 percent as of 8:01 a.m. in N.Y., after falling as much as 1.8%. The Stoxx Europe 600 Index cut early losses to 1.5%.

Michel Keusch, a portfolio manager at Bellevue Asset Management, remains optimistic for the next year, considering a health situation that has been controlled; high transmissibility levels with moderate symptoms; a contained rising interest rate situation, as well as inflation that appears to be in check. "It is not a situation in which I would sell."

Ten-year Treasury bond yields traded at 1.38 percent, reducing falls to two basis points. Risky currencies were underperforming, with the New Zealand dollar and Canadian dollar among the worst performers within the Group of 10.

Antonio Amendola, a portfolio manager at AcomeA Sgr, commented that the sell-off is being driven by year-end volatility and increased concerns about economic development as a result of the omicron’s spreading. "Having said that, we must continue to focus on stories with higher stability and the potential to retain margins in the face of inflation. Small and mid-cap stocks outperform large caps on a relative basis."

'Extremely jittery'

Morgan Stanley analysts advised U.S. equity investors to be conservative. While the new COVID-19 strain exacerbates economic troubles, experts are more concerned with the prospects of supply increasing as consumption declines.

"Markets are extremely jittery, and the information on omicron is not positive," Charles Diebel from Mediolanum mentioned. "But I'm not convinced the effect will stay long. I believe the mix of virus and stimulants implies that this will pass rather fast, that is, by February. Therefore I wouldn't purchase bonds against that backdrop."

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

The context of reduced monetary stimulus in advanced nations is further complicating matters for developing-country assets.

Win Thin, strategist at Brown Brothers Harriman & Co., said that the elimination of stimulative fiscal policy by several major central banks would significantly impact developing economies, as well as other risk assets that rely on abundant liquidity. "As we approach 2022, E.M. is expected to stay under pressure."

Emerging economies

Except for the yuan, currencies of the emerging nations have dropped versus the U.S. dollar in the last half a year. In response to President Erdogan's call for reduced borrowing rates, the Turkish lira plunged to a historical low on Monday.

This year, equities in the MSCI Emerging Markets Index have fallen over 7%, and Monday's market decline was 1.9%.

On Friday, the S&P 500 index continued its weekly decline in high-volume trading. With Christmas quickly coming, it may have been the final day of 2021 with sufficient liquidity for investors to move in and out of significant holdings.

"It seems likely that position squaring instead of chasing will take place before the end of the year, with longs sucking up some of the profits before then.," Chris Weston, researcher from Pepperstone Financial Pty Ltd., stated in a report.