The Greenland chaos will remain the main course of the week

An exotic blend of rising geopolitical tensions between the US and the EU — over Donal Trump’s willingness to buy Greenland — and a major selloff in Japanese government bonds, in the context of Japanese PM Sanae Takaichi confirming a snap election on February 8 in hopes of consolidating power and injecting more public money into the Japanese economy, rattled global financial markets yesterday.

The US 10-year yield flirted with the 2.40% level, while the 30-year jumped more than 25 basis points — a huge move — past 3.90%, and the 40-year pushed above 4%. Selling pressure eased and yields are lower this morning, but the violence of the move almost made investors forget about the US’ willingness to buy Greenland.

In FX markets, dollar and yen bears raced each other to see who could sell faster. Dollar bears were ahead, with the USDJPY fluctuating around the 158 level, while the dollar index fell the most in 10 days.

On the bond side, the US 10-year yield briefly traded above the 4.30% level, as investors continued to reduce US exposure, worried that:

1. The US is becoming too aggressive for allies to continue viewing its government debt as a safe haven, and
2. The exploding US debt pile is unsustainable — the good old US debt story — possibly amplified by fears that military spending must rise if the US becomes more assertive globally.

The bad news is that elsewhere, appetite for bonds didn’t look much better. European benchmark 10-year yields also rose, alongside growing cracks among European members facing differentiated US treatment over the Greenland story — only a handful being subject to fresh tariffs, not all of them.

We heard the German Chancellor say it is normal that the French react more because they are more sensitive to US tariffs, while Italy attempt to mediate the dispute — with little conviction from European peers so far.

The Greenland chaos will remain the main course of the week and will be served again today, as Donald Trump prepares to rock the boat in Davos. The rally in gold to $4’876 per ounce is a good indicator of how uncertain and tense markets have become.

I hope I am wrong — but there is a greater chance that the two sides of the Atlantic will not reach an agreement on Greenland in a single day. The UK and the Irish took almost a decade to reach an agreement on fishing rights; here, we are talking about an issue that could mark the beginning of the end for NATO. The implications would be huge — so huge that no one can fully grasp their extent. What we do know is that, either way, Europe will have to strengthen its defence. All members will need to set aside budgets for increased military spending in the coming years. Regardless of who takes the tariff or military hit today, tomorrow it will be someone else’s turn.

As a result, capital is flowing into European defence stocks, while at the index level, selling pressure dominates.

Across the Atlantic, market mood is no better. Major US indices gapped lower at the open of the holiday-shortened week — which is healthy. It is a sign that investors still care. The S&P 500 lost more than 2%, while the tech-heavy Nasdaq fell even more, on fears that tensions with the EU could finally push Europeans to tax US Big Tech companies.

This would add to the growing list of investor discomforts: circular AI deals, overleveraged investments, delayed ROI, rising metals prices, and higher memory chip costs. It is therefore unclear whether earnings will be enough to soothe nerves. Headline numbers will be tested, as investors dig into the details: has Nvidia converted receivables into cash? What are companies’ real cross-exposures in an environment where everyone’s hand is in everyone’s pocket?

Speaking of earnings, Netflix announced that it amended its offer to buy Warner Bros to an all-cash deal and reported Q4 earnings after the bell. The company narrowly beat earnings and revenue estimates. Ad revenue grew more than 2.5x year-on-year to over $1.5bn — something that could help soothe worries that OpenAI – which will shortly bring ads on its free chatbot - is not generating enough cash to match its massive infrastructure investment. However, Netflix shares fell in after-hours trading as Netflix warned of higher program spending and WB acquisition-related costs.

Looking ahead, we will keep an eye on the Greenland story — impossible to miss — Japanese yields, and upcoming earnings. The only certainty is uncertainty.

As a result, equity volatility is rising, and bond volatility — which had been falling due to strong demand for bonds of all kinds since last year — is likely to rebound from the lowest levels seen since Q4 2021.

Developed-market sovereign bonds no longer offer the diversification investors need in the current environment. They remain under pressure from geopolitical tensions that will drive higher security spending, at a time when debt levels are already unsustainable.

Where does capital go? Into gold, silver, copper, industrial metals, rare earths – hard commodities.

In short, investors are moving into anything tangible. What is striking is that Bitcoin has had little to no role in this flight to real assets. I would have expected stronger performance, but seemingly, the technology appetite weighs heavier than its 'commodity' status.