The eerie calm that had enveloped Wall Street for weeks was shattered as geopolitical disputes over Greenland and fiscal worries in Japan ignited a global bond selloff, violently bringing the "Sell America" trade back into focus. At Tuesday's opening, US financial markets suffered a triple blow across stocks, bonds, and the currency. The S&P 500 plummeted over 2%, not only erasing all its gains for the year but also marking its largest single-day drop in more than three months. The VIX index, a key gauge of market fear, surged to its highest level since last November. Concurrently, safe-haven demand drove gold prices to a historic peak above $4,700 per ounce, US Treasury yields climbed significantly, and the US dollar exchange rate subsequently weakened. This global market sell-off was initially triggered by domestic issues in Japan. The yield on Japan's 30-year government bond soared more than 25 basis points in a single day, fueled by market concerns that Prime Minister Sanae Takaichi's tax cuts and increased spending plans would endanger the nation's finances. This volatility threatened the carry trade—which involves borrowing low-interest yen to purchase global assets—and pushed bond yields higher in other regions. Investors, who had largely adopted a "wait-and-see" attitude towards the Trump administration's actions—including its interventions in Venezuela, threats to neighboring countries, and criticism of the Federal Reserve—are now seeing their patience wane. Trump's demand for US control of Greenland has sparked fears of worst-case scenarios, including a potential rupture of the NATO alliance or the outbreak of a full-scale trade war. In the face of escalating tensions, some analysts suggest that creating market turmoil might be becoming a tactic for Europe to counter pressure. Michael Krautzberger, Chief Investment Officer at Allianz Global Investors, stated, "If I were advising some European governments, I would say you almost need to create some market volatility because Trump cares very much about that, perhaps even more than other political figures." Farewell to the TACO Trade, Volatility Returns Over the past month, volatility in US bonds, stocks, and the dollar had fallen to its lowest level since at least 1990. This unusual calm was partly attributed to traders developing immunity to Trump's rhetoric, betting that he would always retreat at the last moment, a strategy dubbed the "TACO" trade. However, Tuesday's market action signaled a reversal of this sentiment. As the trading session progressed, the S&P 500's losses widened, hitting new lows as Trump delivered a speech from the White House listing his first-year accomplishments. In the US Treasury market, long-term bonds were hit hardest, with the 30-year yield climbing 8 basis points to 4.92%, nearing its late-2023 highs. All major US stock indices fell sharply, led by the Nasdaq and the S&P 500. (US Treasury Yields Rebound) This global market sell-off was initially triggered by domestic issues in Japan. Due to market concerns over the Japanese Prime Minister's tax cuts and increased spending plans, the yield on Japan's 30-year government bond surged more than 25 basis points. This jump threatened the so-called carry trade—the strategy of borrowing low-interest yen to buy global assets—and helped push bond yields higher in other parts of the world. (Japanese Government Bond Yields Rise Across the Board) Simultaneously, Trump's belligerent stance towards European allies intensified investor anxiety, providing another reason for the market to pull funds from US Treasuries. The Danish pension fund AkademikerPension announced it would liquidate its holdings of US government bonds by the end of the month, citing concerns over the significant credit risks created by the Trump administration. Anders Schelde, Chief Investment Officer at AkademikerPension, told Bloomberg, "The US is basically not a good creditor, and in the long run, the US government's finances are unsustainable." Amid Geopolitical Games, Market Uncertainty Rises Although the prevailing view among investors is that the US and Europe will ultimately reach a diplomatic solution regarding Greenland, the chaotic negotiation style from the White House—including Trump adding French champagne to a list of tariff threats—is dampening market confidence. Previously, US stock investors paid little attention to geopolitical friction, with US stocks climbing steadily in early January, driven by the AI boom and strong earnings prospects. The latest survey from Bank of America Corp. showed investor sentiment had reached its most optimistic level since July 2021, with cash holdings falling to a record low. However, the market now must confront uncertainty. Jefferies strategist Mohit Kumar speculated that while a deal to ease tensions would likely be reached eventually, it could take months, during which time markets would face heightened volatility. He noted, "The beneficiaries of escalating geopolitical tensions will be defense stocks, financials, and gold, which we are long on in our portfolio." Alexis Bienvenu, a portfolio manager at La Financière de l'Échiquier, expressed similar concerns: "The market is a bit worried about how far he will go with these new types of threats. While we know that in many cases, Trump has threatened companies and countries with very high tariffs, he always ends up negotiating." Krishna Guha, Head of Central Bank Strategy at Evercore ISI, wrote in a report: "Our base case is that the gravity of the situation will ultimately be contained as investors bet on some form of compromise. But if things spiral out of control, the impact would be very severe and have long-term consequences, including for the US dollar."
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