European equities fell over 1% on Tuesday morning, while Nasdaq and S&P 500 futures also slipped before the bell. And the dollar was under pressure even as the yield on the 10-year U.S. Treasury note rose to 4.265%, marking a four-month high.
Even though the greenback and Treasuries slumped, Trump’s threats lifted demand for other traditional safe-havens. Gold surpassed $4,700 per ounce for the first time on Tuesday.
So far, today’s activity looks more like a ‘sell America’ trade rather than a pure risk-off mood. While the direction of travel is clear, these moves appear to be contained so far, with markets inevitably wary of overreacting after last year’s tariff ructions and climbdowns.
But it is difficult to see how this Transatlantic fracas will be resolved.
President Trump showed no signs of softening his demands on Tuesday, noting in a post on Truth Social that Greenland remained “imperative for National and World Security” and that “there can be no going back”. This comes after he appeared to link his desire to acquire the Arctic island to his failure to win the Nobel Peace Prize last year, which he blamed on Norway.
This should put even more of a spotlight on Davos in the coming days, where the World Economic Forum is entering its second day. President Trump is expected to speak on Wednesday. He recently told journalists that the U.S. would discuss his proposed acquisition of Greenland at the event.
U.S. Treasury Secretary Scott Bessent, who is at the event in Switzerland, told reporters he was “confident that the [European] leaders will not escalate”, brushing off the prospects of a prolonged trade war and a European sell-off of U.S. Treasuries.
It is worth noting that European investors own $8 trillion worth of U.S. equities and bonds, leading some to question what it would take for a sell-off to occur. While some analysts poured cold water on any immediate risk of this happening absent further escalation, others noted that appetite for portfolio diversification away from the U.S. remains strong.
Elsewhere, long-dated Japanese government bond (JGB) yields hit record highs on expectations that the country’s February 8 snap election would lead to looser fiscal policy and further strain public finances. Demand was low at an auction of 20-year JGBs on Tuesday, with yields touching a high of 3.35% as the market priced in the fiscal and political risks.
