The week ahead: When tariffs meet geopolitics

• Greenland in Trump’s sights.
• Is Greenland a step too far for investors?
• Three risks for financial markets.
• Will the EU actually use the ACI against the US?
• Will Trump do his usual and back down?
• Defense stock theme gets a boost from Trump.
• Trump to take the stage at Davos.
• How to navigate a risky geopolitical heavy environment.
• Supreme Court ruling on tariffs in sight.
• US tariff threat could send UK economy into recession.
• The AI threat to tech stocks.
• Event watch: UK data and the start of tech earnings season.

Another week, another move from President Trump for financial markets to digest. President Trump slapped a 10% tariff rate on key European and UK allies because they sent troops to Greenland in order to protect it from annexation from China, Russia or America. Stocks in Asia are lower across the board, and European and US equity market futures are lower at the start of the week. Gold and silver are surging and both reached record highs this morning, and the dollar is broadly lower, all signs that markets are gripped by risk aversion as we wait to see how the Greenland situation plays out.

Greenland in Trump’s sights

The latest move on tariffs was announced on Saturday in a rambling Truth Social post from the President, where he said that he would increase the tariff rate to 25% in June, until the US has ‘purchased Greenland’. There is a problem: Greenland is not for sale according to Greenlanders themselves, which is a self-governing territory within the Kingdom of Denmark.

Tariffs are now the weapon of choice used by President Trump to meet his  geopolitical ambitions, and this has sent a shiver through financial markets at the start of this week.

Is Greenland a step too far for investors?

On a broad basis, risk assets have been resilient to US geopolitical moves so far this year. The escalation of the feud between the President and the chair of the Federal Reserve who said that the President is threatening Fed independence, only caused 10-year US Treasury yields to rise 4bps last week. US stocks ended their 2026 winning streak last week, but they only closed marginally lower, suggesting that investors have been willing to brush off Trump interference as earnings data and a benign economic picture paper over the cracks of an impulsive White House. However, is the prospect of American threats to Greenland, which could essentially rupture a security alliance that has been in place since the end of the Second World War, a step too far for investors?

Three risks for financial markets

The price reaction to the US’s aggressive stance on Greenland and Europe will depend on how traders see the situation playing out in the long term. We see three risks. The first is a breakdown in transatlantic relations, which has economic and political ramifications. Second, although Nato allies have had spats before, this is different. If Trump walks away from NATO, then it will be much harder for Europe to contain Russia, this boosts uncertainty and could hit investment across the Continent. Lastly, if the President does not back down from his latest tariff threat, then it suggests a new stage in the US’s trade wars, one where tariffs are applied randomly so that the President can use economic force to get his way. This would be a dangerous development for the global economy.

Will the EU actually use the ACI against the US?

Europe and the UK are standing up to the threat from the US. The EU is readying $93bn of tariffs on US imports and is also considering limiting American companies from the bloc’s market, using its Anti Coercion Instrument (ACI), which has never been used before. If this was activated, it could limit big tech’s access to European markets and have major implications for all sectors of the economy on both sides of the Atlantic.  As things stand now, the EU/US trade agreement lies in tatters, and this will likely weigh on risky assets at the start of the week.

Will Trump do his usual and back down?

There is hope that the temperature could be lowered. President Trump will be in Davos at the World Economic Forum  on Wednesday and Thursday, where he is set to speak to European leaders, thus there may be no immediate retaliation from the EU before these discussions take place. Added to this, Trump’s latest tariffs on Europe and the UK will not take effect until next month, which means that there is time for the dispute to be resolved. In our view, any sell off could be short lived if the situation improves. The risk is that Donald Trump raises the temperature to force the Denmark’s hand regarding Greenland. We would not put it past the President, who is pursuing an aggressive foreign policy agenda in his second year back in the White House. However, Trump has a history of threatening something and then backing down. Last week, we expected him to launch airstrikes against Iran, but, so far, that has not materialized.

Defense stock theme gets a boost from Trump

One sector that could outperform this week is European defense. The FTSE 100 and the Eurostoxx 50 index outperformed their US counterparts last week, and BAE Systems, Babcock International, Rolls Royce, and Rheinmetall are the top performers in Europe and the US so far this year. One way to assess the threat level to Europe from both Russian aggression and America’s threat to Nato is to look at the performance of these defense stocks. Rheinmetall is higher by more than a fifth so far in 2026, which suggests the risk is high. However, after rallying so hard, if President Trump does back down from Greenland, then defense stocks could be risk from a sell off, but that seems unlikely at this stage.

Trump to take the stage at Davos

This is a big week for markets, and it hinges on Donlad Trump’s tone at Davos. If he increases pressure on Europe to let him have control of Greenland, then we do not think that the benign market environment and low volatility, which is still well below the 12-month average, can persist as we move through January.

How to navigate a risky geopolitical heavy environment

If volatility does pick up across financial markets in the coming days, then investors will be looking for safe havens. The Swissie could benefit, as it’s not a Nato member. The sell off in equities after President Trump announced his reciprocal tariffs in April 2025 also triggered a selloff in Treasuries and the dollar,  and we will be watching sovereign bond markets closely this week. As we enter a radically new era for international relations, traditional safe havens may not be reliable if tensions continue to rise between the US and Europe.

Early signs on Monday suggest that there is mild ‘sell America trade’ at the start of the week. The dollar is down across the board, as the Swiss franc and even the euro pick up some safe haven bids. The euro could benefit as the market assesses that there is safety in numbers. The yen and the pound are struggling this morning, even though they are higher vs. the USD. The pound is weak for obvious reasons, while the yen suffers under the weight of rising Japanese bond yields. The 10-year yield rose 8bps this morning and is at its highest level since 1997. At some point rising bond yields could break something in Japan, and all eyes will be on the Japanese economy and the banking sector in the coming months.

Supreme Court ruling on tariffs in sight

Other themes that are worth watching this week include any update on the Supreme Court Ruling on the legality of some of President Trump’s original reciprocal tariffs. The Treasury Secretary said that he thought it was unlikely that the Supreme Court would overrule the President on tariffs, as this would cause economic chaos. Thus, tariffs could be here to stay.

US tariff threat could send UK economy into recession

If US tariffs are deemed legal by the US Supreme Court, then the UK could be in focus as the extra 10% tariffs could decimate the UK’s car industry. Jaguar Land Rover is just getting back to full production after last year’s cyber-attack, so this blow comes at a bad time. It is also a threat to UK growth. Manufacturing and production provided a major boost to November’s surprisingly robust GDP figure of 0.3%. Cars are the UK’s biggest export to the US, so if Trump does not back down on his tariff threat, then the UK’s economy could be thrust back into recession territory. The pound was the second weakest performer in the G10 FX space last week, and it could sink further if Trump doubles down on his rhetoric at Davos.

The AI threat to tech stocks

Another theme worth watching is the US tech trade. There is a split between chip makers like Nvidia, and software makers like Adobe, Intuit Inc and Salesforce. Anthropic’s new AI agent tool could negate the need for software, as it produces presentations, spread sheets and other business reports without the need for costly subscriptions. AI is an existential threat to software providers, and it is why Salesforce has seen its share price slide by 14% so far this year. In contrast, the Philadelphia semiconductor Index is higher by 11% YTD. Anthropic’s tool is untested, so it could be a case that the software sector has sold off too far, too fast, but for now, the market is not interested in seeing off the AI challenge to this sector. If the risk backdrop falls, we could see broader drops across the tech spectrum.

Event watch: UK data and the start of tech earnings season

Looking forward to this week there are a few things to watch out for. The UK will see the release of labour market data and a CPI report for December. Inflation is expected to rise a notch last month to 3.3% from 3.2%. The BOE had expected a small increase at the end of last year, and it is expected to remain temporary, thus, if CPI is in line with expectations, we may not see much market reaction, with fresh US tariffs the biggest threat to the pound this week, in our view.

PMI data for January is also released at the end of the week, and they could see European and UK sentiment surveys pick up. Sadly, the UK’s unemployment picture is expected to remain bleak. The unemployment rate for the three months to November is expected to inch lower to 5% from 5.1%, which is still high compared to recent years. Earnings growth is expected to edge lower, led by the private sector, and payrolled employees are expected to decline for the fourth straight month in December. A sharper decline in the jobless figures or a surprise pick up in the unemployment rate could see a rush to price in more rate cuts from the BOE. Currently there are 1.8 cuts priced in by the market, but a weak labour market reading could push this up to 2 or even more, which may weigh on the pound even further.

Netflix is also set to kick off earnings season for the US tech sector this week. It will announce earnings on Tuesday night, and analysts are expecting a solid Q4 report on the back of a strong content slate at the end of 2025. The stock is down 6% YTD, and where it goes next could depend on whether the company makes an update about its plans to try and acquire Warner Bros. This will be the key focus on the earnings call, and investors will be watching closely to see if Netflix is willing to increase its offer price, and if it addresses any regulatory risks that the deal could face.

Overall, what Donald Trump has to say at Davos could determine the overall market mood  and performance later this week.