Risk rally pauses, as the focus shifts to geopolitical and macro risks

The global stock market rally that has taken financial markets by storm in recent days has lost momentum as we move through the week. Asian stocks fell by more than 1%, commodities are also lower, with gold, oil and siler all falling.

China/Japan tensions latest geopolitical flareup

There are a few themes that are driving price action today, firstly Japan and China tensions weighed on shares in the two countries as China announced new export controls on Japan, after comments from Tokyo about Taiwan, which angered Beijing. This fallout caused the Nikkei to fall more than 1% and the Hang Seng was also lower by a similar amount.

This fallout comes after Asian stocks had their best start to the year ever, so a pullback after four days of strong gains was to be expected, and geopolitics may have been a convenient excuse to book some profits.

Geopolitical issues rise around the world as Trump takes on Greenland

However, after comments from the White House regarding Greenland on Tuesday, geopolitical risks seem to be rising around the world, which could keep investors on edge during today’s trading session. The White House announced that it was discussing options to acquire Greenland, including using the military if necessary. This comes days after he captured the President of Venezuela and arrested him on drug charges.

Will Trump scale back Greenland rhetoric?

These events highlight a risk that many did not predict in their forecasts for 2026: an unpredictable US foreign policy. While 2025 was all about Trump’s ‘bull in a china shop’ approach to tariffs, 2026 could be the same, but with foreign policy. There are two things that we can learn from 2025 and US centered geopolitical risk: firstly, that President Trump ius prepared to take risks that have major geopolitical and global consequences, and secondly, that he can often roll back on his most controversial claims.

Venezuela had few friends, so taking out Maduro could be easier than taking over Greenland, especially after Europe’s top leaders defended Greenland and Denmark from Trump’s remarks. Thus, although we could see Trump roll back on some of his recent rhetoric around Greenland, it is still unsettling when there is talk of US military force towards a NATO member, which Greenland is as part of Denmark. Thus, it is no surprise that stocks are lower today and bonds are rising, with European sovereign yields falling in early trading.

Oil supply dynamics in focus

The decline in the oil price on the back of comments from Trump, who said that Venezuela would relinquish 50mn barrels of crude oil to the US, has caused Brent crude to tumble back towards $60 per barrel, WTI is down more than 1% and is currently trading at $56.30, a break below $55 for WTI would be a bearish development for the oil price and would signal further losses after 2025’s sharp decline in the price of crude. Although the oil price was initially able to absorb the Venezuela news, today’s move lower is a sign that the oil price continues to be sensitive to any shift in supply dynamics.

Sell off in Europe unlikely to last as defense sector comes to the rescue

This is weighing on the FTSE 100, and after outperforming on Tuesday, it is lagging behind its European counterparts as oil majors including Shell and BP come under pressure. However, we think that any sell-off in Europe will be limited due to the continent’s large defense sector, which is likely to be dominant in these times of uncertainty.

Can the AI theme save markets from Trump?

Aside from geopolitics, the AI theme continues to dominate global markets. Baidu, the Chinese multinational tech giant, said that its AI chip business could raise as much as $2bn in a Hong Kong IPO. Added to this, the S&P 500’s semiconductor sector is one of the top performers so far this year, even if Nvidia has not joined the party and fell 0.5% on Tuesday, after announcing a positive outlook for sales. The Philadelphia semiconductor index is higher by 6% in the past 5 sessions and is outperforming the overall market.  This is a powerful driver for global stock markets, and we will see if it can counter threats to risk sentiment from geopolitics.

Overall, the focus could also shift to the macro today, as we get the US ADP employment report, JOLTS job openings and the ISM service sector survey. This will also be important for markets and could shift the focus away from Trump’s foreign policy exploits.