The market conditions on Wall Street have been unusually subdued in recent weeks. This is because U.S. President Donald Trump's ambition to dominate the Western Hemisphere is threatening the post-war international order. His obsession with annexing Greenland has thrown the transatlantic alliance into disarray, while fiscal concerns in Japan have plunged its bond market into a vortex. The tranquility has thus been abruptly shattered. Following Tuesday's stock market opening, the "divest from America" trade made a forceful comeback, with both U.S. Treasuries and the dollar declining. The S&P 500 and Nasdaq 100 indices plummeted by as much as 2% at one point, wiping out all gains made so far this year. The so-called fear gauge, the VIX index, hit its highest level since last November, while the preferred safe-haven asset, gold, surged to over $4,700 per ounce, setting a new record high. Investors had previously maintained an attitude of indifference towards Trump's various actions—whether it was the swift strike to capture the president of Venezuela, threats against neighboring countries, or repeated criticisms of the Federal Reserve. However, these market fluctuations indicate a shift in their sentiment. Trump's demand to control Greenland has ignited investor anxiety over potential worst-case scenarios, including the dissolution of NATO, the eruption of a full-scale trade war, and even market turmoil in Europe aimed at forcing Washington to back down. "We believe the baseline scenario is that the severity will ultimately be contained, as investors are betting on some form of compromise," wrote Krishna Guha, Head of Central Bank Strategy at Evercore ISI. "But if things spiral out of control, the impact would be very severe, with long-term effects, including for the dollar."
Over the past month, volatility in U.S. bonds, stocks, and the dollar had already fallen to its lowest level since at least 1990. This was partly because traders had largely learned to ignore Trump's daily bombast, betting that his most serious threats would not materialize. Last April's market crash forced him to pause tariff implementation, giving rise to the so-called "Trump Always Caves On" (TACO trade). Investors who subscribe to this strategy view sell-offs as buying opportunities. European leaders are currently grappling with how to counter Trump, and some analysts believe market selling could become a potential tool to restrain him. In the U.S. Treasury market, long-term bonds bore the brunt of the impact, undermining Trump's goal of lowering interest rates. The yield on the 30-year U.S. Treasury note rose by 7 basis points to 4.9%. "If I were advising some European governments, I would suggest they almost need to generate some market volatility because Donald Trump cares about that, probably more than other politicians," said Michael Krautzberger, Chief Investment Officer for Public Markets at Allianz Global Investors, Germany's largest asset manager. The global market sell-off was initially triggered by domestic issues in Japan. Plans by Prime Minister Sanae Takaichi to cut taxes and increase spending sparked concerns, causing the yield on Japan's 30-year government bonds to surge by more than 25 basis points. This jump threatened the so-called carry trades that utilize Japan's low-interest loans to purchase global assets and also pushed up bond yields in other markets. Simultaneously, Trump's belligerent stance towards European allies fueled investor panic, providing another motive to withdraw from U.S. Treasuries, thereby exerting upward pressure on interest rates. The Danish pension fund AkademikerPension announced it would exit its U.S. Treasury positions by the end of the month, citing the "unignorable credit risk" created by the Trump administration. "The credit situation in the U.S. is fundamentally not good, and from a long-term perspective, the U.S. government's fiscal position is unsustainable," AkademikerPension's Chief Investment Officer Anders Schelde said on Tuesday. Investors widely believe that the U.S. and Europe will reach a diplomatic solution regarding Greenland. However, the White House's chaotic negotiation style and Trump's addition of French champagne to the list of tariff threats have dampened market confidence. Just recently, U.S. stock investors paid little attention to geopolitical friction, focusing instead on the AI boom and strong profit prospects, which kept the broader market climbing early in January. A survey conducted by Bank of America before the Greenland tensions escalated over the weekend found that fund managers' optimism was at its highest level since July 2021, while protection against a stock market correction had fallen to an 8-year low. Furthermore, cash levels had dropped to a record low, and stock allocations had risen to their highest level since December 2024. Jefferies strategist Mohit Kumar speculated that an agreement to defuse the Greenland tensions would eventually be reached. However, that could take months, leaving markets exposed to greater volatility in the interim. "The beneficiaries of heightened geopolitical tensions will be defense stocks, financials, and gold, which is precisely what our portfolio is long on," he wrote. At La Financière de l'Échiquier, Alexis Bienvenu expressed similar concerns. "The market is a bit scared about how far he will go with these new threats," the portfolio manager said. "We know that Trump has threatened extremely high tariffs on companies and countries in many situations, but in the end, he has always gone to the negotiating table."
