President Trump’s intensifying standoff with European leaders over the fate of Greenland prompted a sharp response from investors Tuesday morning, with the value of U.S. stocks, dollar and government bonds all falling.
The S&P 500 dropped over 1 percent as investors reacted to Mr. Trump’s increasing threat of higher tariffs on European allies unless they supported his plans for America to take control of Greenland.
Tuesday morning’s decline was the first time the index has started the day that much lower since April amid turmoil from Mr. Trump’s initial sweeping tariff threats on nearly all of America’s trading partners.
Often when stocks are roiled by geopolitical upheaval, investors flock to the safety of other U.S. assets, like the dollar or government bonds. But in a sign that investors were embracing a “sell America” trade and moving away from U.S. assets altogether, both the dollar and U.S. government debt lost value Tuesday morning.
The dollar index, which pits the currency against a basket of currencies that represent America’s major trading partners, fell 0.8 percent. The dollar weakened against every currency from the group of 10 nations, which includes the euro, British pound and Norwegian Krone.
The yield, which moves inversely to price, on the 10-year U.S. government note rose, meaning its value declined. This yield acts as one of the most important interest rates in the world by underpinning interest rates across consumer and corporate debt. The 10-year yield rose 0.1 percentage points, to 4.3 percent, its sharpest move higher so far this year, undermining the administration’s efforts to move interest rates lower.
Tuesday morning’s trading was the first chance U.S. markets had to react to Mr. Trump’s escalating threats toward Europe over the weekend with the U.S. stock market closed on Monday in honor of Martin Luther King’s Birthday.
One bright spot in the stock market came from the rising value of defense stocks. Northrop Grumman, an aerospace and defense company, nudged higher Tuesday morning, pushing further into record territory having risen almost 20 percent already this month.
Great. The markets are betting on war.
And Europe has some tricks of its own up its sleeve:
Trump’s request to purchase land under the jurisdiction of another nation has not gone down well with the Western world. While the U.S. may be the biggest economy on the planet, patience is wearing thin among its allies, after a year of barbed back-and-forths over tariffs and military spending.
This weekend’s power flex may be a stretch too far, economists are now warning, and Trump’s weakness may prove to be America’s voracious spending habits.
Deutsche Bank’s Jim Reid highlighted that Liberation Day tariffs in April were stepped back a week later, after U.S. Treasury yields saw a “scary” session as investors retreated to safety, away from American borrowing.
“Financial markets may play a big part in how this situation resolves itself,” Reid wrote in a note to clients this morning. “The main Achilles Heel of the U.S. is the huge twin deficits. So while in many ways it feels like the U.S. holds the economic cards, it doesn’t hold all the funding cards in a world that will be very disturbed by the weekend’s events.”
Investors, analysts, and world leaders have long wondered when—or if—a debt crisis would occur in one of the nations burdened by a massive deficit. While the likes of Japan, the U.K., and France are by no means balancing their books, America’s $38 trillion deficit dwarfs its counterparts. While a great deal of that debt is held by the public (including the Fed, where President Trump is also in hot water), vast sums are also owned by foreign governments and overseas investors.
This exposure—to the tune of $8 trillion—ING pointed out, may be something European leaders decide to remind the White House of. Europe being America’s largest lender “illustrates the deep interdependence between the U.S. and Europe but also shows that, at least theoretically, Europe also has leverage on the U.S.,” wrote Carsten Brzeski, global head of macro, and Bert Colijn, chief economist for the Netherlands. The duo added: “Whether in practice, Europe would really engage in a ‘Sell America Inc’ season is a completely different question. There is very little the EU could do to force European private sector investors to sell USD assets; it could only try to incentivise investments in EUR assets.”
The EU also has a weapon in its arsenal that it has yet to deploy. French President Emmanuel Macron has suggested now is the time to use the E.U.’s Anti-Coercion Instrument (ACI). The tool is a set of countermeasures against any foreign powers that unduly interfere in the policy choices of the E.U. or its member states, by restricting U.S. companies from accessing the European market, banning them from bidding for government work, restricting trade, and curtailing foreign investment.
The E.U. could also impose new tariffs on about $100 billion of its imports from the U.S.
This, Goldman Sachs believes, is likely to be one of the reactions European leaders are now weighing. Analysts Sven Jari Stehn and Giovanni Pierdomenico wrote this weekend that the legislation had been designed precisely for situations like this—though perhaps not with a strong ally like the U.S. in mind.
The duo wrote: “Starting the activation does not mean implementation (which requires several steps) but signals potential E.U. action and allows time for negotiation. The ACI could involve a range of policy tools broader than tariffs, such as investment restrictions, taxation of U.S. assets and services.” On services, the E.U. conveniently holds a surplus over the U.S., meaning it would inflict greater harm in this particular industry compared to similar action from across the Atlantic.
Billionaire investor Ray Dalio warned Tuesday that President Donald Trump’s aggressive political direction could spark a new phase of global financial conflict, as foreign governments and investors reconsider their appetite for U.S. assets amid rising unease and economic tensions
“On the other side of trade deficits and trade wars, there are capital and capital wars,” Dalio told CNBC’s “Squawk Box” at the World Economic Forum in Davos, Switzerland. “If you take the conflicts, you can’t ignore the possibility of the capital wars. In other words, maybe there’s not the same inclination to buy at U.S. debt and so on.”
The founder of Bridgewater Associates, one of the world’s largest hedge funds, is concerned that countries holding large amounts of U.S. dollars and Treasurys may become less willing to finance U.S. deficits if trust erodes. At the same time, the U.S. continues to issue large volumes of debt, creating a problematic situation if confidence weakens on either side, Dalio said.
“We know that both the holders of U.S. dollars are denominated … and those who need it, the United States, are worried about each other. Right? So if you have other countries who are holding it, and they’re worried about each other, and we’re producing a lot of it, that’s a big issue,” he said.
Treasury prices tumbled Tuesday as investors weighed renewed tariff threats from Washington that revived fears of a trade war with Europe and spurred a flight away from U.S. assets. The president has intensified his rhetoric on Greenland, threatening to impose new tariffs on countries opposing the sale of the Danish territory to the United States.
Dalio said history offers multiple examples of similar episodes in which economic conflict escalated beyond trade into capital flows and currency disputes. “When you have conflicts, international geopolitical conflicts, even allies do not want to hold each other’s debt. They prefer to go to a hard currency. This is logical and it’s factual, and it’s repeated throughout the world history,” he said.
“I will talk today about the breaking of the world order, the end of a pleasant fiction and the beginning of a brutal reality where the geopolitics of the great powers is not subject to any constraint,” said Mr. Carney, who used a mixture of French and English in his address in Davos, Switzerland.
“Every day we are reminded that we live in an era of great power rivalry,” he said. “That the rules-based order is fading. That the strong do what they can, and the weak suffer what they must.”
He added, “Let me be direct: We are in the midst of a rupture, not a transition.”
Mr. Carney, who received a standing ovation, spoke not long after Mr. Trump posted an A.I. image on social media that included a map of American flags superimposed over both Canada and the United States.
Jesus.
In his speech on Tuesday, Mr. Carney said that Canada’s commitment to an article in the NATO treaty that views an attack on any member as an attack on all members was “unwavering.” That article was not written with the consideration that one member would be attacking another. It is also not clear that all NATO members would respond militarily to an attack on another member.
Canada and the United States have a joint command for North American air defense. This week aircraft from both countries are at an American air base in Greenland as part of a regular training exercise that the joint air command said had been approved by Denmark.
In his speech Mr. Carney called on medium-size countries like Canada to band together to offset the power of the United States, China and Russia.
“The middle powers must act together because if you are not at the table, we’re are on the menu,” he said. “Great powers can afford now to go it alone.”
We’re all on the menu.
Have a nice day!