Although global markets exhibited risk-averse sentiment overnight, the reaction remained relatively restrained. Analysts at Goldman Sachs believe that Trump's threat to use tariffs as leverage to force the purchase of Greenland is more of a negotiation tactic, consistent with his habitual strategy of 'escalating first, then de-escalating.' It is expected that Trump will reach a compromise at the last moment.
Despite the threat by U.S. President Trump to use tariffs as leverage to force the purchase of Greenland, global markets have displayed risk-averse sentiment but reacted relatively restrained. Analysts believe this is simply another instance of Trump’s typical “maximum pressure” negotiation strategy, with both sides ultimately reaching some form of compromise.
Over the weekend, Trump threatened to impose tariffs on multiple European countries, including the UK, France, and Germany, in order to pressure Denmark into ceding Greenland. Before the US stock market opened on Tuesday,$E-mini S&P 500 Futures (MAR6) (ESmain.US)$ fell by more than 1%,$E-mini NASDAQ 100 Futures (MAR6) (NQmain.US)$ futures dropped nearly 2%.
$Gold Futures (FEB6) (GCmain.US)$ rose by 3%,$Silver Futures (MAR6) (SImain.US)$ surged over 7%.
According to the Wall Street Journal, these fluctuations are far lower than the market reactions expected during catastrophic events—since 1964, the S&P 500 has experienced an average of 21 similar declines annually, while gold futures since 1979 have seen about 15 comparable increases per year. This indicates that panic has not gripped the market.
Analysts suggest that this geopolitical standoff may follow Trump’s frequently used script of “escalate to de-escalate.” Rich Privorotsky, head of Goldman Sachs’ Delta-One division, pointed out that his base scenario anticipates Trump reaching a compromise at the eleventh hour. He noted that this position lacks domestic popularity, with polls showing only 17% of Americans supporting efforts to acquire Greenland, and a majority of both Democratic and Republican voters opposing the use of force to annex the island.
Fourfold Logic Behind Market Reaction
According to analysis by the Wall Street Journal, investors’ subdued response to the Greenland incident can be attributed to four factors. First, the market may have developed immunity to Trump’s rhetoric. When Trump announced “reciprocal” tariffs in April last year, the market reaction was stronger, but the economy eventually performed well, with corporate investment rising and inflation, although slightly higher, remaining below the levels at the start of Trump’s term by year-end.
Second, this could signal the revival of the “TACO trade”—betting that Trump will always back down at the last minute. While some of his policies have been implemented, it is difficult to determine when he is serious and when he will concede. Even if he is serious, Congress does not support the idea, and the Supreme Court may soon rule his tariff tactics illegal.
Third, investors may see potential benefits. A frightened Europe would significantly increase military spending, leading to a surge in European defense stocks on Monday, while European domestic utility stocks benefited from risk-averse capital inflows. If European governments increase spending, shareholders stand to gain.
Fourth, a new world order is hard to imagine, and investors may choose to ignore it due to the difficulty in pricing this prospect. History offers similar precedents—in 1914, investors ignored the assassination of Archduke Franz Ferdinand for nearly a month until war broke out and panic set in. In 1918, after the new Russian government defaulted on its debt, Russian bond prices continued to rise for months.
Betting on 'Compromise at the Last Minute'
Goldman Sachs analysts believe that the market's lack of panic is largely due to investors perceiving Trump's threats as more of a negotiating stance.
Rich Privorotsky, head of Goldman Sachs' Delta-One division, stated that the current situation aligns with known negotiation strategies: if the U.S. objective is more about mineral rights, an expanded military presence, or a unified Arctic alliance, this extreme pressure is aimed at securing the most favorable terms for the U.S. at the negotiating table.
Moreover, domestic political factors in the U.S. also constrain radical actions. Privorotsky pointed out that this year is a midterm election year, and adopting highly unpopular policies carries significant risks. A Reuters/Ipsos poll showed that only 17% of Americans support Trump's acquisition of Greenland, with the majority of both Democrats and Republicans opposing the use of force to annex the island.
The timing of this incident is also intriguing, coinciding with the week of the Davos Forum. Privorotsky believes this is no coincidence, further suggesting that it may be a meticulously planned game.
Meanwhile, the U.S. Congress does not support this idea, and the Supreme Court may soon rule on whether Trump’s tariff measures are legal. These factors lead investors to view this tariff threat as a short-term disruption, with some even betting that Trump will 'chicken out' at the last minute, as he has done in the past.
Sell automatically when the target price is reached, and stop loss if the support level is breached! Once one condition is triggered, the other is automatically canceled, making trading more worry-free >>
Editor/Rice
