New trade war fears unsettle markets

Escalating tensions due to US President Trump’s rhetoric over Greenland destabilized markets this week. But they rallied after he walked back threats of military action and tariffs. 

On Tuesday, Trump ramped up his demands for Greenland to become part of the US. The resulting volatility led to the S&P 500 closing down 2.1%, wiping out 2026 gains. The yield on 10-year US Treasuries rose to a four-month high of 4.29%. Trump has previously said the US would acquire the island “one way or the other” and refused to rule out using military force. The US dollar weakened 0.3% against a basket of major currencies in the wake of the escalation.

The sell-off in US assets recalled the so-called “sell America” trade observed last year, when global investors acted on concerns about exposure following the implementation of the “Liberation Day” tariffs in April 2025. The escalation in rhetoric followed an announcement on January 17 that saw the US outline an extra 10% tariff on Denmark, the UK, Finland, France, Germany, the Netherlands, Norway and Sweden.

The prospect of another potential trade war hit European markets and investors sought out less-volatile assets. The Stoxx Europe 600 index closed 0.7% down on Tuesday, while the VIX index – a measure of short-term volatility – leapt to its highest level since November. Gold passed US $4,800 per troy ounce to hit a record high. 

However, global markets rebounded on Wednesday after Trump announced he had reached the framework of an agreement with NATO Secretary General Mark Rutte and would drop the tariffs scheduled for 1 February. The S&P added 1.2% on Wednesday, while the Stoxx Europe 600 rose 1.1% in early trading on Thursday. 

Damian McIntyre, Head of Multi Asset Group at Federated Hermes urged investors to not overreact to short-term market volatility and emphasised the importance of looking beyond headlines when assessing the longer-term impact of this week’s events.

“The tariff threats created fear and confusion among investors. But what we learned in 2025 is that the Trump administration often uses tariffs as a leveraging tool for negotiating,” he said. In the event that the US economy strengthens in 2026, and US companies deliver strong earnings reports, market volatility could create further buying opportunities for investors. 

Valuations remain quite stretched in the US and the likelihood of a sell-off is present, said Louise Dudley, Portfolio Manager at Federated Hermes. “The volatility we have seen this week won’t have helped the situation, but we are optimistic about the longer-term outlook. We are focused on the stimulus measures – which include sweeping tax cuts – that are coming because of the One Big Beautiful Bill Act signed last year. It should reinforce consumer confidence in the US and will likely sustain the 2026 outlook for companies.”