For weeks on Wall Street, markets were unusually subdued as U.S. President Donald Trump threatened the post-war order by asserting US dominance of the Western hemisphere.
But with his drive to take over Greenland throwing the European and American alliance in disarray — and Japanese bonds plunging on concerns over the country’s finances — the calm abruptly snapped.
As stock markets opened on Tuesday, the “Sell America” trade came back in full force as Treasuries and the dollar slid. The S&P 500 dropped as much as 1.6%, erasing all of this year’s gains, and the VIX Index, a measure of expected stock-market swings, hit the highest since November. Gold — a go-to haven — rose to a new record of over $4,700 an ounce.
The moves show that investors’ previous willingness to shrug off Trump’s actions — including the White House’s capture of Venezuela’s leader, its threats to nearby countries, and renewed attacks on the Federal Reserve — is beginning to erode.
But Trump’s demand for US control over Greenland is stoking investor anxieties about potential worst-case scenarios, including a rupture in the NATO alliance, a full-blown trade war, or European steps to foment market turbulence as a way to force the Trump administration to back down.
“Our bet is that in the base case the severity will ultimately still be contained as investors bet on some version of a compromise,” wrote Krishna Guha, head of central bank strategy at Evercore ISI. “But the impacts would be very severe if this goes off the rails, and there will be long-lasting implications, including for the dollar.”
Volatility across US bonds, equities and the dollar over the past month had sunk to the lowest since at least 1990.
That’s in part because traders have largely learned to tune out Trump’s daily salvos, wagering that the worst of his threats won’t come to pass. The tactic, honed after the April market meltdown drove him to pause his tariffs, became known as the TACO trade — with investors seeing selloffs as a chance to buy.
European leaders now grappling over how to push back against Trump, with some analysts seeing a market selloff as one potential way to deter Trump. In the US Treasury market, longer-dated bonds were hit hardest, undermining Trump’s goal of seeing lower interest rates, as 30-year yields climbed 7 basis points to 4.9%.
“If I were an advisor to some European governments, I would say you almost need to create a little bit of market volatility because Donald Trump cares about that a lot, probably more than other politicians,” said Michael Krautzberger, chief investment officer for public markets at Allianz Global Investors, Germany’s largest asset manager.
The global market selloff was first triggered by domestic issues in Japan, where yields on 30-year debt surged over a quarter percentage point on concerns about Prime Minister Sanae Takaichi’s plans to cut taxes and boost spending. The jump threatened to unravel so-called carry trades — which involve buying global assets with low-interest loans in Japan — and helped push up bond yields elsewhere.
Meanwhile, Trump’s bellicose stance toward European allies fanned fears that it would give investors another incentive to pull back from US Treasuries, which would likely put upward pressure on interest rates.
Danish pension fund AkademikerPension announced it will exit US Treasuries by the end of the month amid concerns that the Trump administration has created credit risks too big to ignore.
“The US is basically not a good credit and long-term the US government finances are not sustainable,” Anders Schelde, chief investment officer at AkademikerPension, told Bloomberg on Tuesday.
The widespread view among investors is that the US and Europe will reach a diplomatic solution on Greenland. But the chaotic style of White House negotiations, with Trump adding French champagne to his list of tariff threats, is putting a chill on market confidence.
US stock investors had lately given little heed to geopolitical frictions, with stocks continuing to climb in early January, as the artificial-intelligence boom and strong profit outlook took center stage. In Bank of America Corp.’s latest survey, investors were the most bullish since July 2021 and reported record low cash levels.
At Jefferies, strategist Mohit Kumar speculated that a deal will eventually be struck that defuses the tension over Greenland. Yet an agreement could take months, leaving the markets facing heightened volatility in the meantime.
“Beneficiaries of the rise in geopolitical tensions would be defense stocks, financials and gold, and we are long these in our portfolio,” he wrote.
At La Financière de l’Échiquier, Alexis Bienvenu echoed that sense of concern.
“There is a bit of fear in the market of how far he can go on new types of threats,” the portfolio manager said. “We know that in many cases Trump has threatened companies and countries with very high tariffs, but at the end he engages in negotiations.”
—With assistance from Sagarika Jaisinghani.
©2026 Bloomberg L.P.
