Geopolitical drama drives gold to fresh highs, stocks sharply lower, euro bags gains as Japan’s bond market creaks

Geopolitical drama in spades is fuelling price action across global markets as the US ratchets up the pressure over Greenland with President Trump saying “there can be no going back”. Trump also said he will hold a meeting in Davos with “various parties” to discuss Greenland after a “very good” call with Nato secretary-general Mark Rutte. Although we are seeing some notably sharp moves in the market the expectation and hope is that a deal is done. Otherwise, we’re in uncharted waters and we see some much bigger swings. The key is whether a) Trump is bluffing as per the usual TACO/art of the deal, b) Europe can call the bluff without escalating too much first. If he’s really deadly serious about acquiring the island as part of the USA come what may, then things get real ugly from here.

The noise has investors scrambling for cover – gold surged to a fresh record high at $4,725/oz and silver attacked the $95 handle as it extends its monster rally. US Treasuries sold off along with the dollar perhaps as investors reassessed their exposure to US assets on a broad ‘sell America’ trade. EURUSD has moved over 100 pips in the last two sessions, bouncing off a two-month low at its 200-day moving average to take a 1.17 handle again this morning. 

Stocks across the board are being sold off and we could see a sharper move in Vix futures than we are seeing right now as Wall Street reopens after yesterday’s holiday. I don’t think the market is prepared for the escalation risk as it’s a pretty steep ramp from demands and threats about tariffs to a full-blown battle over trade and the US taking over Greenland – the Europeans don’t appear to be in much of a mood to back down and have a serious weapon in the ACI to take out US tech giants. It’s more of an intercontinental ballistic missile than a ‘bazooka’ as it’s sometimes called. If we see Europe retaliate, the US will double down and the economic fallout starts to look pretty dire for markets that have been riding high. If a deal can be done to avoid escalation markets can rally but make no mistake we are in Trump’s brave new world. Something else will come along sooner or later.

The FTSE 100 held up OK yesterday, down just 0.4% amid broad risk-off moves elsewhere as its defensive characteristics helped insulate. But this morning the FTSE 100 was under a lot more pressure and dropped 1.3%, in line with losses for the DAX and CAC, which fell 1.3% and 1.8% respectively yesterday. Selling is broad-based and complete – just 7 risers on the FTSE 100 at last look – ie this is a macro selloff rather than relating to sectoral exposure to eg defense, which has generally been very strong due to the geopolitical drama. This is also about trade policy – which has severe economic repercussions potentially. Yesterday I looked at some stocks that could offer some insulation from a trade war.

US futures are sharply lower following the MLK holiday with S&P 500 futures and Dow futs both trading around 1.5% lower. SPX is looking to open about 100pts lower to test its 50-day moving average at 6,830. Nasdaq futures gapped sharply lower at the open last night to below the 50-day SMA and are extending their run to the downside and round number support at 25,000. The VIX jumped to 20.41 pre‑market, up 1.58 points (8.4%) as macro pressures weighed. 

Why is the ‘Sell America’ trade being talked about again? Economic policy uncertainty and the President’s capricious approach to diplomacy is one thing, but it goes deeper – fears about institutional weakness – Fed independence being a big one. Note we could hear from the Supreme Court today on tariffs.

But it’s a little more complex – Japanese bond yields are shooting up to multi-decade highs amid worries that the authorities have lost of control of the bond market as new tax and spending promises are destabilising JGBs and spilling out across the sovereign space. The worries over fiscal loosening in Japan come ahead of a snap election being called for 8 February. Note that low Japanese yields have for decades been a key source of global liquidity, so these moves will have repercussions globally.

The point is that the US dollar is not serving as a safe haven because it seems to be entirely US-driven and raises fears about US policy and European exposure to US assets – $8tn in stocks and bonds apparently. Amid yen and US dollar weakness the euro looks the least ugly of the three right now even if a major escalation of a trade standoff would be very tough economically for the Eurozone. Nevertheless, if we are seeing a paradigmatic shift in the geopolitical world order then we are just as much seeing realignment of investors’ views of US assets. Recent developments suggest we could see further dollar selling.

Finally, sterling is catching a bid against the broadly weaker USD but it’s lower against the euro as unemployment and wage data this morning indicate it’s time for the Bank of England to cut rates faster. Add the threat of tariffs and broader trade and economic uncertainty into the mix and it gives me more confidence the Bank of England will cut deeper than markets have been thinking – 3% on Bank Rate by year-end. Private sector wage growth cooled to just 3.6% from 3.9% a month ago, while the unemployment rate stood at a four-year high of 5.1% with payrolls down 33k month-on-month and 155k in the last year. Read the week ahead here.

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