For months, capital market participants have scratched their heads and mused about what could possibly derail such great conditions.
Never mind the AI-supercharged US stock market — the Euro Stoxx 50 entered record territory a year ago, while the S&P Markit iTraxx Europe Main index of investment grade credit default swaps has been trying to break down through 50bp again, as it failed to do early last year before US president Donald Trump’s tariff splurge on April 2.
That cheerful bemusement has been swept away by one word that never troubled the capital markets in the hundreds of years they have existed: Greenland.
It is perfectly clear now that something could upset markets in the immediate future — Trump’s eccentric and outrageous demand that the US take over the Arctic island, which has autonomy under Danish sovereignty.
Trump’s claims that the US needs to protect Greenland from being conquered by Russia or China are cobwebs. Denmark already grants the US military bases in Greenland, which is protected by the Nato alliance.
He wants Greenland for the personal glory of adding to US territory a land mass four times the size of France and for control of its rich reserves of rare earth minerals. Never mind that these are already accessible to US and other companies without annexation.
Greenlandic, Danish and European leaders have all said a purchase is out of the question, while trying to placate Trump with offers of talks and compromise.
Yields jolt up
So far, the market impacts have been modest. Investors have got used to a lot of noise with Trump and shifting positions decisively on headlines to get ahead of a wave of selling is likely to get you caught by a backwash when the administration veers in a different direction.
The dollar, which had strengthened this year from €0.85 to €0.86, has gone back to square one.
Stock markets have weakened, as investors price in Trump’s threats of 10% tariffs on European countries resisting his demands from February 1, going up to 25% from June 1. When US trading resumed on Tuesday after the Martin Luther King Day holiday, there was red ink on Wall Street. The S&P 500 and Euro Stoxx 50 have lost all this year’s gains.
The bond market’s reaction has been just as clear: it doesn’t like the Greenland threats.
US Treasuries are feeling the sharp end of its displeasure. Even when Federal Reserve chair Jay Powell announced on January 11 that the US Department of Justice was pursuing a criminal investigation against him and declared this a deliberate assault on the Fed’s independence, the 10 year yield bumped along at around 4.18%.
But the last four trading days, during which Trump’s harassment of Greenland has intensified, have pushed it up to 4.29%, its highest since September. Awkward for a president trying all kinds of novel economic tricks to get consumer borrowing costs down.
The 10 year Bund’s back-up has been more muted, from 2.81% to 2.87%.
The rhetoric has also brought a stop to the breakneck pace of bond issuance by emerging market borrowers in the first half of January. Bankers who urged issuers to go early lest buoyant markets turn queasy are feeling vindicated.
Backs to the wall
In both his terms, Europe has tried to deal with Trump by mollifying him. Agonisingly aware of their dependence on US nuclear and conventional military protection — and that Trump has often questioned US adherence to Nato’s duty of mutual defence — European governments have had to accept his readiness to surrender Ukrainian territory and rights to Russia.
Last year the EU and UK were forced into humiliatingly unequal trade deals with the US.
In light of this pattern, many doubt European leaders can muster the resolve to repel Trump’s grab for Greenland.
But the signs are that they are finally finding some spirit. “I do not understand what you are doing on Greenland,” French president Emmanuel Macron texted Trump.
“First principle: full solidarity with Greenland and the Kingdom of Denmark,” declared Ursula von der Leyen, European Commission president, in Davos on Tuesday. “The sovereignty and integrity of their territory is non-negotiable.”
UK prime minister Keir Starmer insisted on Monday: “any decision about the future status of Greenland belongs to the people of Greenland and the Kingdom of Denmark alone. That right is fundamental, and we will support it,” adding that “the use of tariffs against allies is completely wrong”.
Rather than quail at the threat of tariffs, as last year, the EU quickly said it would retaliate — and might even use its Anti-Coercion Instrument, a package of powers to hit back at foreign entities trying to bully the Union economically.
Introduced in 2023 mainly as a defence against China, the ACI has never been used, but Trump’s pressure over Greenland would clearly warrant it.
Want peace? Prepare for war
Capital market participants love their peace and quiet. They like to keep their heads down, ignore traumautic world events from war in Gaza to US missile strikes on Iran, and keep churning out deals.
But it is clear to many, right across Europe’s political spectrum, that taking territory from a European country is a line the US cannot cross.
It would end the Nato alliance and kill any hope of sustaining the global principle of self-determination which has been the pole star of international relations since 1918.
The new world’s savage motto would be ‘dog eat dog’. Taiwan’s freedom is in imminent peril.
The longer the Greenland crisis goes on, the more it will erode confidence in markets, widen spreads, raise yields, deter issuance and undermine investment.
Leave aside the effects on business confidence — this will directly cost European taxpayers money as government borrowing costs rise.
Since a low on October 15, the Danish 10 year yield has already risen 27.5bp, and 6.5bp relative to Bunds — and that is one of Europe’s best credits.
A full scale trade and financial battle between the US and Europe would be devastating for both economies and their capital markets.
Capitulating to the US would be even worse — confirming the jeers of many that Europe has lost its way, its confidence and its power. If the European Union proved unable to defend one of its members, its credibility too would be in tatters.
Speak with one voice
Morality, politics, economics and finance all call for one thing: Europe to show a firm and united resolve that it will not tolerate any more US claims to Greenland.
US access for defence and commercial purposes can be negotiated in a calm and friendly way, but any change of sovereignty can only be by the free choice of Greenland’s inhabitants.
Considering the benign and supportive governance Greenlanders now enjoy, which has so far put them off demanding immediate independence, even if some aspire to it in the longer term, being swallowed by a Trump-led US is unlikely to seem attractive.
It should by now be clear to all: Trump respects strength but exploits weakness.
European leaders must rapidly and with one voice declare to Trump: stop your threats.
They must tell him Europe will retaliate against any economic measures as firmly as China did last year — which swiftly forced Trump to back down. Europe has many levers besides tariffs — its large holdings of US Treasuries and Big Tech’s massive revenues and tax advantages in Europe being two.
And the US must understand that any use of its troops to take Greenland would be an act of war that would end Nato and all the US’s military and economic privileges in Europe.
Appeals to good nature, friendship, reason and priniciple will not work with Trump and his coterie. The language they have chosen is self-interest and menaces.
If Trump knows gaining Greenland would cost him Europe, he will find some other target.
Anything less than perfect clarity from Europe will leave this issue as an open wound, bleeding confidence in its leaders and markets indefinitely.