Disconcerting Déjà Vu

China’s grand reopening after three years of government-imposed isolation was supposed to save the global economy from a deep recession and rescue risk sentiment after a dastardly year for financial assets of all sorts.

Instead, Xi Jinping’s forced abandonment of strict virus containment protocols is turning into yet another headache for war weary investors.

With daily infections in China reportedly running in the tens of millions and little to no visibility into the state of the nation’s outbreak, health officials in other countries fear an upsurge in cases tied to Chinese travelers, who are now free to move about the cabin — and the globe.

The US will mandate negative PCR or antigen tests for passengers arriving from China, while Italy was poised to test all arrivals from the world’s most populous country after 35 of 62 people on a flight to Milan’s Malpensa airport were positive. 62 out of 120 on another flight were shown to be infected.

“The measure is essential to ensure surveillance, detection of possible variants and protect the Italian population,” Health Minister Orazio Schillaci said Wednesday, explaining the decision to mandate tests for all passengers arriving from China. Earlier this week, Japan said it’d likewise require negative tests for Chinese travelers.

This is disconcerting déjà vu for the world, and particularly for Italy, among the first and hardest hit Western nations after the original virus made its way out of Wuhan in early 2020. Some fear new variants may emerge from China’s giant re-opening wave. The prospect of algos trading a theoretical all-caps Bloomberg headline announcing the identification of a new strain is concerning, especially with nerves already frayed after a year of rate hikes, inflation and a hot war on NATO’s doorstep.

Of course, it’d be foolish to read too much into this week’s price action. Volumes are obviously abysmal, and liquidity is surely non-existent. S&P volumes were around 30% below average on both Tuesday and Wednesday, while trading in Treasurys and credit was similarly thin. The docket in the US was limited to housing data, which was dire.

A historically bad month for big-cap US tech got worse coming off the holiday. After shedding nearly 3% on Tuesday and Wednesday, the Nasdaq 100’s losses for December reached double digits.

The good news, assuming you’re the silver lining type, is that just as thin markets and poor liquidity can amplify downside, effectively transforming a mild holiday hangover into a notable downdraft, so too can the post-Christmas vacuum (with a little help from erratic vacuum tubes) be fertile ground for a rally during 2022’s final trading sessions.

I wouldn’t count on that, though. This hasn’t exactly been a lucky year for market participants.