Will it be another script of "maximum pressure, last-minute compromise"? The market "understands" Trump very well
In response to Trump's threat to purchase Greenland through tariffs, the market reacted relatively restrained. Analysts believe this is a form of "maximum pressure" strategy that may ultimately lead to a compromise. Although U.S. stocks and European markets experienced slight declines and gold prices rose, the volatility was lower than expected, indicating that the market is not in a state of panic. Analysts pointed out that investors have developed immunity to Trump's statements and expect him to back down at the last moment, while also seeing potential gains, leading to a mild reaction
In the face of U.S. President Donald Trump's threat to use tariffs as leverage to force the purchase of Greenland, global markets have shown a risk-averse sentiment, but the reaction has been relatively restrained. Analysts believe this is merely Trump's usual "maximum pressure" negotiation strategy, and ultimately, both sides will reach some form of compromise.
Over the weekend, Trump threatened to impose tariffs on several European countries, including the UK, France, and Germany, to compel Denmark to hand over Greenland. Overnight, U.S. stock markets were closed, with S&P 500 futures dropping slightly over 1%, European stock markets experiencing similar declines, and gold rising by less than 2%.
According to The Wall Street Journal, these fluctuations are far below the market reactions expected from catastrophic events—since 1964, the S&P 500 has averaged 21 similar declines per year, and gold futures have averaged 15 similar increases per year since 1979. This indicates that the market has not exhibited panic.
Analysts believe this geopolitical stalemate may follow Trump's common script of "escalate to de-escalate." Rich Privorotsky, head of Goldman Sachs' Delta-One division, pointed out that his baseline scenario is that Trump will reach a compromise at the last moment. He noted that this position is unpopular domestically, with polls showing that only 17% of Americans support the effort to acquire Greenland, and a vast majority of voters from both the Democratic and Republican parties oppose using force to annex the island.
Fourfold Logic Behind Market Reaction
According to The Wall Street Journal's analysis, investors' mild reaction to the Greenland incident can be attributed to four factors. First, the market may have developed immunity to Trump's rhetoric. When Trump announced "reciprocal" tariffs last April, the market reacted more strongly, but ultimately the economy performed well, corporate investment increased, and inflation, while slightly rising, remained below the levels seen when Trump took office by the end of the year.
Second, this may be a revival of the "TACO trade"—betting that Trump will always back down at the last moment. While some of his policies have been implemented, it is difficult to determine when he is serious and when he will concede. Even if he is serious, Congress does not support this idea, and the Supreme Court may soon rule his tariff measures illegal.
Third, investors may see potential gains. Alarmed Europe will significantly increase military spending, leading to a surge in European defense stocks on Monday, while domestic utility stocks in Europe benefit from a flow of safe-haven funds. If European governments increase spending, this will be favorable for shareholders.
Fourth, the new world order is hard to imagine, and investors may choose to ignore this prospect due to the difficulty in pricing it. Similar situations have occurred in history—after the assassination of Archduke Franz Ferdinand of Austria in 1914, investors ignored the situation for nearly a month until war broke out, leading to panic. After the new Russian government announced a debt default in 1918, Russian bond prices rose instead of falling for several months.
Betting on "Last-Minute Compromise"
Goldman Sachs analysis suggests that the reason the market has not panicked is largely because investors believe Trump's threats are more of a negotiating posture Goldman Sachs Delta-One department head Rich Privorotsky stated that the current situation aligns with known negotiation strategies: if the U.S. goals are more about mineral rights, expanded military presence, or a unified Arctic alliance, then this extreme pressure is aimed at securing the most favorable terms for the U.S. at the negotiating table.
Moreover, domestic political factors in the U.S. also constrain aggressive actions. Privorotsky pointed out that this year is a midterm election year, and the risks of adopting highly unpopular policies are significant. A Reuters/Ipsos poll shows that only 17% of Americans support Trump's acquisition of Greenland, with the vast majority of Democrats and Republicans opposing the use of force to annex the island.
The timing of this event is also intriguing, coinciding with the week of the Davos Forum. Privorotsky believes this is not a coincidence, further confirming that this could be a carefully orchestrated game.
Meanwhile, the U.S. Congress does not support this idea, and the Supreme Court may soon rule on the legality of Trump's tariff measures, factors that lead investors to view this tariff threat as a short-term disruption, even betting that Trump will, as in the past, "chicken out" at the last moment.
Risk Warning and Disclaimer
The market carries risks, and investment should be approached with caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at one's own risk.
