As tensions rise between the United States and Europe, investors try to remain calm, with many drawing on the experience of Liberation Day as a tool for how to respond. Current geopolitical volatility.
Analysts are understandably upset. Their concerns stem from President Trump’s claims group of european countries If they don’t support the U.S., they’ll face new tariffs within weeks Bid to buy GreenlandIt is currently the territory of NATO member Denmark, which will not sell the island.
As of this writing, the VIX Volatility Index is up 27% over the past five days, its highest level since the Oval Office announced sweeping tariffs on every country in the world last April. While U.S. markets haven’t had a chance to react to the news after being closed for the Martin Luther King holiday, European assets looked bleak.
At the time of writing, Germany’s DAX index was down 1.57%, London’s FTSE index was down 1.4% and France’s CAC 40 index was down 1.2%. Asian stock markets also performed poorly, with Tokyo’s Nikkei 225 Index falling 1.11% and Hong Kong’s Hang Seng Index falling 0.29%. A preview of US trading comes in the form of futures, with the S&P 500 trending down 1.75% at the time of writing.
Meanwhile, gold prices – a barometer of investors fleeing safe-haven assets – are rising. Keep climbing to greater heightsup 1.17% overnight.
However, the losses could be worse: Investors don’t even need to look back a year for inspiration. Markets plunged after Trump spoke in the Rose Garden on April 2, so-called Emancipation Day, despite his threat to impose tariffs was delayed within a few days. Thus, the “burrito” trade was born: Trump was always timid.
jim reed Deutsche Bank It noted to clients this morning that there was “room for more volatility” in the market, stressing that Trump’s tariffs on major trading partners were no longer tenable. That’s because the Supreme Court is about to rule on whether the White House’s first round of tariffs was legally imposed. This “could ultimately further limit Trump’s room for maneuver on tariffs. However, no one knows when that will come to fruition (except maybe the judges).”
“Markets have been hurt before by overreacting to tariff threats,” Reid continued. “Obviously, there are Liberation Days, but most recently Trump’s escalation against China in October sent the S&P 500 down -2.71% on the day, before he met with Xi Jinping and extended the trade truce for another year.”
UBS chief economist Paul Donovan described a rational market: “Investors and the U.S. government are likely to continue to focus on U.S. bond markets, which have weakened slightly after Trump’s latest tariff threats. The impact of additional tariffs is to increase U.S. inflationary pressures and further weaken the dollar’s status as a reserve currency. So far, bond investors do not appear to be taking these threats too seriously.”
Markets also dismissed another Trump quip aimed at French President Emmanuel Macron, that he would impose tariffs on Champagne and Bordeaux if the European leader refused to pay $1 billion to join the Gaza Peace Commission.
traders who don’t believe
Further evidence of TACO traders comes from Polymarket. At the time of writing this article, only 17% The good guys think all the tariffs Trump threatens to impose on Europe will go into effect on February 1st. A minority of 40% believe any tariffs will take effect within two weeks.
The odds are also falling across countries. For example, Denmark leads Polymarket poll As the country most likely to face US taxation, this is still a peripheral result of 40% and falling. Meanwhile, France has a 38% chance of imposing tariffs and Norway a 37% chance.
Political polls are likely to reinforce the idea that the president will do another U-turn, especially as the November midterm elections approach. Trump’s approval rating keeps falling Across multiple points of salenine out of ten Americans tell of a Quinnipiac University survey They oppose the use of force to seize Greenland. further Reuters/Ipsos poll found that only 17% of voters supported Trump’s efforts to acquire Greenland.
However, if investors or foreign governments rely too much on the idea that Trump will back off, they could be shooting themselves in the foot. After all, if the White House thinks the market is performing reasonably well, that might give him the confidence to move forward with the plans investors are betting on. as Henry Allen of Deutsche Bank Last year, Trump set an Aug. 1 deadline for tariffs: “Paradoxically, as the market discounts and performs strongly on tariffs, it is actually more likely that tariffs will be raised as confidence in the administration grows.”