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McMillan: Trader’s Lament—Omicron Casts a Giant Shadow

Avoiding overreacting is key for traders and governments.

The last thing a fatigued world needed was a new Covid variant, and that goes double for the financial markets.

Yet, here we are again, as the new Omicron variant threatens to wreak havoc with the stock market, just as it rebounded from a recent month-long correction.

“Omicron is quickly being discovered the world over, apparently due to travel from South Africa,” said Alex Frew McMillan in Real Money. “Once more the world is shutting down, locking borders, imposing restrictions that we know all too well.”

Will markets sell off as harshly as they did in March 2020, when Covid first swept the world? It looked like they might on Friday, when equities sold off hard and currencies were in flux.

There is some sunlight piercing through the Covid gloom, McMillan noted.

The South African rand weakened 2.9% in the 48 hours between November 24, the day that Omicron was reported to the World Health Organization, and November 26, when the WHO a "variant of concern." “But the South African currency has stabilized and in fact is 1.0% stronger on Monday,” McMillan added.

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The South African rand weakened 2.9% in the 48 hours between November 24, the day that Omicron was reported to the World Health Organization, and November 26, when the WHO dubbed it a "variant of concern." “But the South African currency has stabilized" and even rose on Monday,” McMillan noted.

The Topix stock benchmark in Tokyo closed down 1.0% in Monday trade, resulting in a 3.9% slide since Friday. Hong Kong's Hang Seng benchmark is also off 1.0% at the close, and down a similar 3.6% since Thursday's close. In Australia, the S&P/ASX 200 fell 0.3% on Monday, down 2.2% since the end of trade Thursday. Singapore has also sold off 1.3% for a 3.0% two-day trading loss.

“That’s a weakness, but hardly panicky fire-sale pricing,” McMillan noted. “You wouldn't want to be running an airline, that's for sure. Cathay Pacific (HK:0293) (CPCAF), the Hong Kong flagship carrier, has seen its shares slide 3.7% on Monday and 7.8% when you factor in Friday's fall. Singapore Airlines (SG:C6L) (SINGF) is down 2.8% today and 6.5% in two trading days. Gambling stocks were also hit hard in Hong Kong, as well.”

That’s bad news for Asian travel, and travel-linked stocks, since Chinese visitors dominate most markets, and it’s bad news for 1.4 billion Chinese who want to go abroad.

“It’s also bad news for the 7.4 million residents stuck in Hong Kong,” McMillan said.

“Let's hope Omicron is understood quickly, and the world can continue its gradual re-opening. Asian borders are closing fast again, and there's risk of government overreaction,” he added. “Investors should avoid the same mistake.”

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