Greenland, Japanese bond sell off and UK employment to dominate

Stocks and bonds are a sea of red on Tuesday as  tensions around Greenland remain high. In the UK, the labour market data proved to be a brief distraction from geopolitical concerns. The UK’s jobless rate remained at the highest level since 2021 in November, and  the number of payrolled employees fell for the fourth consecutive month, the 43k decline in December follows a 33k drop in November. Job losses have been felt most keenly in the hospitality and retail sectors and is another sign of weak hiring activity in the UK economy.

Regular wage growth fell a notch to 4.5% in the three months to November, however, average earnings including bonuses were 4.7%, which suggests that residual inflation within the UK economy is feeding through to wage packets, which may cause a headache for the BOE. Once again, private sector wage growth is trailing overall wage growth.

Public sector wage growth surges, but are we near the peak?

Public sector wage growth was a massive 7.9% in the three months to November, double the rate for the private sector. The government’s choice to boost public sector wage growth continues to be felt in the economic data and is one reason why wage inflation remains so high in the UK compared to elsewhere.

The ONS said that one reason for the worrisomely elevated public sector wage growth were base effects, with public sector wage rises coming earlier in 2025 compared with 2024. The ONS have said that public sector wage growth has reached its peak  and will moderate over the next few months.

However, the gap between the private sector, which is burdened by payroll tax rises and is fueling the rise in the unemployment rate, and the bloated public sector is stark. This is not the sign of a healthy and dynamic economy, one that can adapt to the rapidly changing world order.

Further sign of UK labour market softening

The number of job openings was also down, there were 2.5 people per vacancy in the three months to November, compared to 2.4 in the prior quarter. This suggests that the UK’s jobless situation is worsening, albeit at a slow rate.

Pound brushes off Trump’s Chagos criticism and gets a boost back to $1.35

The market reaction to the UK jobs data has been mostly felt in the pound, which is rising sharply on the back of strong wage growth. GBP/USD is approaching $1.35 as demand for the dollar withers. A selloff in global bond yields is also having an effect on the FX market, and the euro is also advancing on Tuesday and is testing $1.17.

Japan’s bond yields are surging, is this Japan’s Liz Truss moment?  

Global bonds have been led lower by a further sell off in Japanese bonds. The 40-year yield rose above 4% earlier today, and the 30-year yield is higher by more than 25bps, an unprecedented move.

This is a major line in the sand for the BOJ, and it could increase intervention risks and more QE. The 10-year yield is higher by another 10bps. We mentioned on Monday, that the sell off in JGBs was triggered by the snap election that will be held on 8^th January. The prospect of a win for Takaichi, who has promised an expansionary fiscal policy when the Japanese debt to GDP ratio is already nearly 250%, is causing a major upset in the Japanese bond market. Japan can’t afford tax cuts right now, and unless the BOJ intervenes it is hard to see how yields will normalize. If Takaichi is not careful in this election campaign, the similarities between her and Liz Truss could haunt her.

Greenland developments crucial for market sentiment

What happens next for financial markets will ultimately depend on  President Trump’s actions in the coming days. Greenland continues to be the focus for investors. The President posted a picture of himself holding a US flag on Greenland, suggesting that the territory will be owned by the US this year. However, he also said that he will hold a Greenland meeting at Davos, after a good conversation with the Nato secretary general and former Dutch PM, Mark Rutte. For now, Trump is sticking to his guns and said that there is ‘no going back’ on his Greenland pledge. Thus, the meeting in Davos later this week will be critical.

US continues to bash its allies

The US administration has also dialed up its rhetoric against its main allies in recent days. On Monday, Treasury Secretary Scott Bessent said that Europe can’t get anything done because of the ‘dreaded’ European working group. Earlier this morning, the President attacked the UK prime minister for giving away the Chagos Islands, something he previously supported. He cited the UK’s deal with Chagos as one of the reasons why Greenland’s national security cannot be guaranteed by Europe. Also, there are no signs that the President will back away from tariffs on European nations that have sent troops to Greenland.

This suggests a massive rift in relations between Europe and the US, which makes Europe look weak at a time of great change for the world order. The outcome of these meetings in Davos will be vital to heal the relationship between the US and Europe and to stop the President’s ‘trash talking’ of Europe and the UK, which can damage international reputations.

Gold is safe haven of choice as silver takes a breather

The developments so far today have caused the gold price to surge by more than 1% to a fresh record above $4,700 an ounce. However, the rally in the silver price has slowed down and silver is up only a notch so far this morning. While precious metals have been the go-to asset during the current period of geopolitical instability, the stalling of the silver rally just under $95 an ounce, suggests that there is a limit to this rally. Added to this, the sell off in the bond market may cause economic worries to surface, and silver is more closely linked to the global economic cycle compared to gold.  

The ‘sell America trade’ makes a comeback

The dollar continues to weaken on Tuesday and Treasury yields are rising sharply, as the US bond market reopens after Monday’s public holiday. The 10-year yield is above 5bps this morning, as Japan leads a global bond sell off. Combined with a weaker dollar, this suggests that Donald Trump’s extraordinary attack on his allies and plans to shake up the world order by annexing Greenland is triggering a ‘sell America’ trade.

European bond yields are also rising, but the US and Japan  are the major underperformers today. US equity futures are pointing to a sharply lower open later today with loses currently expected of more than 1% for the S&P 500 and the Nasdaq. European stocks have also fallen for a second day, led lower by car makers and luxury stocks which face the brunt of the US President’s tariff threat.

The risk off tone to markets is set to continue Tuesday. Davos is now the key event for this week; however, it is very hard to predict what will come out of the meetings held in the Swiss ski resort as the US seem to be hardening their position regarding Greenland. Uncertainty is a key feature of trading this week.