Act three: Greenland

Something quite unusual has been happening to me over the past few weeks: I am losing my words. I lose my words in the absurdity of the news flow. I simply don’t know what to say or how to express myself while staying polite. And every week, since the year began, has kicked off with abnormal news.

The first Monday, it was the US creeping into Venezuela, allegedly to take its president out of his bed and bring him to the US. Oil prices initially jumped, but the rest of the market barely flinched.

Last week, Jerome Powell took a hit, with an investigation into the Federal Reserve’s (Fed) HQ renovations — which he pushed back brilliantly, saying the investigation was not conducted against him, nor against the renovation itself, but was rather an expression of the White House’s frustration with the Fed’s cautious rate-cutting policy. That certainly tempered any market reaction, but it added to unease around the Fed’s independence — and its consequences. Gold and metal prices hit record after record.

This week starts with news that some European countries will be slapped with fresh US tariffs — 10% starting in February, and up to 25% from June onwards — until the US acquires Greenland. Needless to say, gold kicked off the week by refreshing records, hitting $4’690 per ounce in Asia. Silver also traded at a record high, just above $94 per ounce, and copper is also up.

The US Dollar is down on revived trade tensions, and European futures are unsurprisingly preparing for a bearish start to the week. In the US, it’s a bank holiday.

So my feeling, looking at the news flow, is that the foundations of a potentially significant market selloff are being laid — whether due to geopolitical frictions or renewed trade tensions.

This week, world leaders will meet in Davos — the timing is perfect. The potential implications of Greenland will be felt intensely. Europe could manage the tariff crisis with relative calm, but the security dimension may provoke a different reaction. First, only a handful of European countries are facing tariffs — not all of them. I am not a geopolitical expert, but a clear “divide and conquer” dynamic is at play, which could complicate intra-European relations, as the decisions will not have the same impact on every member, and could further weaken the continent. I hope Europeans will think twice before reacting.

The most realistic option would be for Europe to strike back using the so-called Anti-Coercion Instrument, a legal framework that allows the European Union to respond collectively when a third country uses economic pressure to influence EU or member-state policies. Concretely, this could result in retaliatory tariffs — against US Big Tech companies, for example — but also investment restrictions. That may explain why tech-heavy Nasdaq futures are under heavier downside pressure this morning than Dow Jones futures.

What’s clear is that European defence stocks may have plenty more to enjoy amid darkening global skies, and diversification will be key.

Speaking of which, Chinese stocks start the week feeling the pinch of mixed economic data: better-than-expected production and growth figures, but softer-than-expected sales data continue to scream that China needs external demand to keep going.

But, the winds could be turning for China. On Friday, Canada’s Mark Carney met Chinese President Xi Jinping to sign a trade agreement. The pictures were striking — Carney and Xi smiling and shaking hands as if they had been close for years. Yet it has been roughly eight years since the two countries last reached this level of engagement. My guess is that the chances of a similar U-turn in Europe’s stance toward China are increasing.

After all, the notion of shared values with the US is increasingly being questioned.

If you are looking for good news, you have to go all the way to Korea, where geopolitical headlines are no match for the appetite for buying tech. The Kospi index, seemingly careless, has pushed to a fresh record high.

Nearby, however, Japanese equities look less comfortable this morning. Global headlines and rising trade tensions between the US and Europe are not soothing, and the yen continues to struggle. Or rather, yen bulls are struggling to overpower the bears, even though the USDJPY at current levels is deeply frustrating Japanese politicians and keeping officials keen to intervene directly to relieve selling pressure and flush out overheated short positions — at least temporarily. But for now, the yen bears keep charging.

What’s next? The 160 level will likely be the line in the sand that could trigger FX intervention. On the other hand, the so-called Takaichi trade is also running hot — supporting equities while weakening JGBs and the yen. Selling pressure on the yen has intensified since Takaichi called a snap election earlier this month to consolidate power and squeeze further fiscal support. The Bank of Japan (BoJ), meanwhile, is willing to hike rates to tame inflation that has reached levels my generation of Japanese has not seen in adult life. Yet even that has failed to dislodge the yen bears.

Even a broadly weaker dollar this morning has not been enough to push the USDJPY meaningfully lower. The pair dipped to 157.50 before rebounding in Tokyo. What could reverse the yen selling?

Interestingly, there are rumours that Takaichi may not fare well in the upcoming elections. According to these reports, Japan’s largest opposition party and a former ruling coalition partner are forming a bloc — the Centrist Reform Alliance — to oust Takaichi, focusing on improving the lives of ordinary people by halting yen depreciation and fighting inflation. The latest reports suggest the snap election could be held on February 8. Before that, the BoJ is expected to meet this week, but is not expected to change its rate policy just yet. The next BoJ hike could arrive as soon as April if yen weakness persists and inflation remains elevated.

For traders, current levels look tempting for top-sellers — but that also means swimming against a powerful trend. So, don’t be too greedy if you are long the yen.