Stocks were poised for a significant decline at the opening, while European equities experienced a downturn on Tuesday, as investor sentiment remained cautious regarding President Donald Trump’s contentious interactions with European leaders concerning the ownership of Greenland. The announcement of a snap election in Japan has created turbulence in the Asian markets. Dow futures were down 765 points, or 1.5%. S&P 500 futures declined by 1.7%. Futures associated with the Nasdaq 100 experienced a decline of 2%. The VIX volatility index, often referred to as the fear gauge, experienced a notable increase of 27%, surpassing the 20 mark for the first time since November. Investors have re-engaged in the “Sell America” trade, leading to a sell-off of the US dollar and bonds. The dollar index, a gauge of the dollar’s strength relative to six prominent currencies, experienced a decline of 0.9%. The benchmark 10-year yield, which moves inversely to prices, increased to 4.29%. On Sunday, Trump issued a warning regarding a potential 10% tariff on imports from eight European nations, including Denmark, the United Kingdom, and France, coinciding with his assertions that the United States should seek to acquire the Danish territory.
The US stock and bond markets observed a closure on Monday in recognition of Martin Luther King, Jr., Day. Consequently, Tuesday marks the first full day for traders in these markets to respond to the significant developments over the weekend, particularly the escalating trade tensions between the United States and Europe. “The latest developments serve as a reminder that the US economy is not immune to the uncertainty generated by Trump’s policy shifts, while lingering concerns over Fed independence — amplified by the delayed nomination of a new chair and the ongoing probe into Jerome Powell — add another layer of caution around the US currency,” stated George Vessey. Europe’s benchmark Stoxx 600 index, which tracks stocks across the region, experienced a decline of 1% on Tuesday morning. The Stoxx 600 experienced a decline of 1.19% on Monday, marking its most significant drop since November.
Denmark’s OMX Copenhagen 20, which monitors the 20 most actively traded shares on Copenhagen’s stock exchange, experienced a decline of 0.1%. The OMX Copenhagen 20 experienced a decline of 2.73% on Monday, marking its most significant drop since October. Global investors are attempting to analyze the potential evolution of tensions between the United States and Europe. “This is one of those be-ready-for-anything weeks as wildcards abound for both US and global markets — most of them POTUS-related,” Ed Yardeni stated in a Monday note. Despite investor anxiety, the stock market’s losses to date have remained relatively modest when juxtaposed with the upheaval triggered by Trump’s original “Liberation Day” tariff declaration in April. Investors are exercising caution as they monitor the situation for a possible off-ramp, particularly in anticipation of the US Supreme Court’s decision regarding Trump’s invocation of an emergency powers act to impose tariffs. The Court is currently assessing the legality of the president’s invocation of the International Emergency Economic Powers Act of 1977 in the context of implementing tariffs. The forthcoming ruling is poised to have significant implications for Trump’s renewed threat of imposing additional tariffs on imports from certain European nations.
“Markets will trade risk-off, but bet that either the Supreme Court will take away Trump’s authority to impose tariffs in this manner, or Trump will deliver a TACO reversal anyway,” stated Krishna Guha. However, as tensions escalate, uncertainty prevails. “With the EU preparing potential retaliation — including not just tariffs but also possible use of the ‘anti-coercion instrument’ that would be extremely punitive towards US companies doing business in Europe — investors should be prepared for the likelihood that we are still on the way up in the ‘escalate to de-escalate’ cycle, and that the headlines could get worse before they get better,” Sarah Bianchi. The anti-coercion instrument, often referred to as Europe’s “trade bazooka,” serves as a deterrent designed to counter threats from adversarial governments.
In other markets, metals experienced a significant increase as investors turned to safe havens. Gold futures experienced an increase of 3%, while silver futures rose by 7.3%, with both commodities reaching unprecedented levels. “Trump’s tariff announcement has escalated trade tensions into an entirely new dimension — one driven less by economic logic and more by political motives,” Carsten Brzeski stated in a Monday note. “It is also pushing the long-standing transatlantic relationship into a severe crisis, with a clear risk of further escalation and unwarranted negative consequences for both Europe and the US economy,” Brzeski stated.