Market overview
Take a large dose of opposition, anger and threats of retaliation from targeted parties. Add a sprinkling of support for those in the line of fire from international leaders and members of the antagonist’s own support base. Then mix in lashings of negative market reaction. And there you have it, the ingredients for one of the quickest TACO (Trump always chickens out) servings seen to date.
It all started with US President Donald Trump’s announcement on Saturday 17 January that he would not rule out force to annex Greenland from fellow Nato ally Denmark and that he would slap eight European countries with tariffs of up to 25% for sending a handful of troops to Greenland. Just days later (the following Wednesday) Trump said he would not use force and would no longer go ahead with his tariff threat.
Take your pick for possible triggers for the retreat. Trump’s detail-lite meeting with NATO Secretary General Mark Rutte at which “the framework of a future deal with respect to Greenland” was agreed; the threat of retaliation by Europe; Canadian Premier Mark Carney’s rallying call to middle powers to come together in the face of a rupturing of the old world order; opposition voiced by members of Trump’s own Republican party; weak US financial markets including the dollar, treasuries and equities. All likely played their part but mention in despatches goes to financial markets. That’s because negative market reaction has now been a key ingredient in all the various TACOs that have littered the first year of Trump’s second term.
Good job too. For with the checks and balances carefully embedded into the US Constitution (Congress, the judiciary) by the Founding Fathers proving ineffective and a Republican Party under the spell of its leader, it is increasingly falling to markets to take up the headteacher mantle to keep the US President in check. Witness how markets recovered ground lost after Trump backed down—global equities finished the week largely unchanged.
And markets growing role as global policeman is not confined to Trump. Japan too has been facing the wrath of markets. The yield on the 10-year Japanese government bond (JGB) rose to 2.25% over the course of the week, the highest it’s been since 1997, on concerns over Prime Minister Takaichi’s proposal to suspend Japan’s 8% sales tax on food for two years at an estimated cost of US$32bn. There were similar moves at the long end with the yield on the 40-year JGB moving above 4% for the first time. Yields have been on the rise since Takaichi unveiled a US$135bn fiscal spending plan in November, which only served to focus minds on Japan’s high debt burden.
Takaichi’s explanation for calling a snap general election likely didn’t help—the Prime Minister is seeking a public mandate for her spending plans, fuelling speculation that the country’s public purse strings could be loosened further. So, the question is, will markets force Takaichi to rein her ambitious spending plans in? If they do, there could well be another TACO trade to keep tabs on—the Takaichi always chickens out trade.
Weekly market moves and economic news:
The MSCI All Country World Index (MSCI ACWI) was fractionally off 0.1%, bringing the year-to-date (YTD) gain to 2.3%.
United States:
Considering the risk-off sentiment at the start of the week, US equities did well to finish with only marginal declines—the main US stock index ended the week off 0.3% (+1.1% YTD). Once again, value (-0.2%) outperformed growth (-0.5%) stocks. That’s four weeks in a row that value has beaten growth. This shows up clearly in the YTD numbers—value is up 3.9% YTD while growth is down 1%. Small caps remain the pick of the lot, a 0.3% fall on the week hardly made a dent on the YTD gain which stands at 7.6%. US Treasuries also enjoyed a post-TACO rally with yields finishing the week largely unchanged: the 10-year Treasury yield was up one basis point to 4.23% (up six basis points YTD); similarly, the 2-year Treasury yield rose one basis point to 3.60% (up 12 basis points YTD).
As well as the Greenland TACO, sentiment was buoyed by relatively positive economic data. There was an upgrade to real gross domestic product (GDP) growth for the third quarter thanks to higher exports and investment—the economy grew at an annualised rate of 4.4% compared to the previous estimate of 4.3%. Better news on the consumer front too with the University of Michigan’s final reading of its Consumer Sentiment Index for January. This came in at 56.4, an increase on December’s 52.9, although lower than January 2025, suggesting high prices and a weak jobs market continue to weigh on sentiment. Speaking of jobs, employment data showing layoffs remain at relatively low levels—at 201,500, the latest four-week moving average of new applications for unemployment benefits is the lowest it has been in two years.
United Kingdom:
Like the US, UK equities saw the medium-smaller end of the market outperform large caps—London’s top tier index gave up 0.9% (+2.2%) while mid-caps tacked on 0.1% (+3.9% YTD). Large caps with their international tilt more susceptible to global geopolitics, while the more domestically focused mid-caps perhaps buoyed by a preliminary composite Purchasing Managers’ Index (PMI) reading of 53.9, the highest it’s been for 21 months. This has positive read across for quarterly GDP growth. Not such a good week for gilts after December’s UK inflation was stronger than expected—prices rose 3.4% compared to November’s 3.2% and expectations of 3.3%. The yield on the 10-year gilt yield rose 11 basis points to 4.51% (up four basis points YTD). The weak US dollar saw sterling end the week at US$1.36 compared to US$1.34 previously.
Europe ex UK:
The MSCI Europe ex-UK Index closed off 1.1% (+2.6% YTD), unsurprising given Trump’s Greenland threats: Germany’s main index was down -1.6% (+1.7% YTD); France’s -1.4% (-0.1% YTD); Italy’s -1.8% (0.1% YTD); while Switzerland finished -2.0% lower (-0.9% YTD). Like sterling, the euro strengthened against the US dollar, ending the week at US$1.18, compared to US$1.16 previously. Finally, the yield on the 10-year German bund rose eight basis points to 2.91% (up five basis points YTD).
