US tariff hike escalates transatlantic Greenland tensions

In focus today

In the euro area, finance ministers are voting on a new ECB vice president, with Latvian central banker Kazāks and former Portuguese central bank governor and Eurogroup President Centeno as top candidates. Their recommendation will be followed by consultations with the European Parliament and ECB Governing Council before formal appointment by the European Council. The appointment will influence the composition of the six-member ECB executive board, with four positions, including the presidency, opening in the next two years. While the decision may temporarily tilt the ECB's balance, consensus to keep rates steady limits significant market impact.

In Sweden, Origo's 'small' inflation expectation survey among money market players is published at CET 08:00. Longer (2-5 years) expectations have been stable close to 2% while 1-year is lower, reflecting that the upcoming food VAT tax cut will be temporary drag on inflation. The report should be market neutral.

Key releases in the week ahead include UK December jobs data on Tuesday and CPI data on Wednesday. On Thursday, Norges Bank will hold its interim policy meeting. On Friday, January flash PMIs for the euro area, UK and US will be released, alongside Swedish unemployment figures. The Bank of Japan is expected to leave policy rates unchanged at its meeting early Friday. Finally, Japanese PM Takaichi may announce a snap election this week, with 8 February tentatively proposed.

Note that US markets are closed for trading today for Martin Luther King Jr. Day.

Economic and market news

What happened overnight

In China, Q4 GDP as well as the monthly batch of data were released. While GDP was in line with expectations at 4.5% y/y and hitting the 5% target for 2025, the monthly data shows China's economy is still struggling with weak domestic demand and continued housing crisis. Retail sales for December rose only 0.9% y/y (prior: 1.3%) while new home prices dropped by 0.37% m/m (prior: -0.39%). Home sales continue to grind lower from very low levels. Investment growth was weak at -3.8% year-to-date in December (prior: -2.6%). Industrial production rose from 4.8% to 5.2% y/y (cons: 5.0% y/y) reflecting strong Chinese exports. The data still point to a two-speed economy that is highly unbalanced and with continued deflationary pressures. The GDP deflator was negative in Q4 at -0.7% y/y after -0.9% y/y in Q3. We expect more of the same in 2026 as it will take time for China to move out of the housing crisis, which is currently weighing on consumers. More stimulus will be needed this year but we expect it again to be insufficient to end the housing crisis at this stage, which is needed to lift domestic demand.

What happened since Friday

In geopolitics, the Greenland debate escalated on Saturday as President Trump announced tariffs on goods from Denmark, Norway, Sweden, France, Germany, the Netherlands, Finland and Great Britain. The tariffs, set to begin at 10% on 1 February, are scheduled to increase to 25% by 1 June unless the US secures a deal to purchase Greenland. In a joint statement, the targeted countries condemned the move, expressing unwavering support for Denmark and Greenland, and warned of significant risks to transatlantic relations.

During an emergency meeting in Brussels on Sunday evening, EU member states agreed to prioritise dialogue and diplomacy with the US and decided to delay the implementation of retaliatory measures until 1 February, should the tariffs take effect then. Various options were discussed, including the use of the anti-coercion instrument (ACI), which restricts trade licenses and blocks access to the single market. The EU could also reactivate a EUR 93 billion retaliation package that was prepared last year in response to earlier trade disputes with the US. So far, the market reaction has been negative but modest, likely due to expectations that the tariffs may be ruled illegal by the Supreme Court within the coming weeks. Attention now turns to updates from the extraordinary summit of the European Council expected in the coming days, along with developments from the World Economic Forum, which is taking place throughout this week.

In the US, industrial production recovered in December, with output growing 0.4% m/m SA (cons: 0.1%) and capacity utilization rising to 76.3% (cons: 76.0%), though still historically low. Fiscal stimulus, tariffs and a weaker USD should lift competitiveness of domestic production, which is needed because goods imports are currently falling clearly behind final demand. At the same time, the US current account deficit narrowed to its lowest level since 2016, despite retail sales and PCE data showing no signs of cooling demand for goods.

In the race for the next Fed chair, President Trump praised economic adviser Kevin Hassett at a White House event on Friday, shaking up the closely contested race for Fed chair between Hassett and Kevin Warsh. Prediction markets now place Warsh as the clear frontrunner with over 50% probability. President Trump is expected to announce a replacement for current Fed Chair Powell in the coming weeks.

Equities: Equities advanced last week, extending what has been a strong start to the year. The most notable feature so far in 2026 has been the broadening of market leadership. This is not the same narrow set of stocks driving performance as last year. Only on Friday, more than two weeks into the year, did large caps marginally outperform small caps. That being said, the Russell 2000 outperformed the Dow Jones, Nasdaq and S&P 500 on Friday. Turning to Asia this morning, several equity markets are trading higher. This is notable given the significant geopolitical escalation over the weekend. In other words, the geopolitical situation so far has a very limited impact on Asian markets. From a relative trade perspective, one could also argue for a marginally positive substitution effect. European and US equity futures are modestly lower this morning. In isolation, this is not particularly remarkable given the situation. The decline is roughly around 1 percent, a move that could easily have occurred on many other days. This already serves as a first illustration of how markets are, at least for now, digesting the geopolitical backdrop.

FI and FX: All focus this morning is on the EU political response and the market reaction to Trump's threat over the weekend to impose tariffs on Denmark and economies opposing the idea of a US takeover of Greenland. So far, the market reaction has been negative but still relatively modest with both US and European equity futures down c. 1%. EUR/USD is trading roughly 30 pips higher from Friday's close, risk sensitive currencies have weakened marginally, and precious metal prices have continued to rise.

A potential reason for the limited responses could be the fact that any US tariffs would have to be implemented under the IEEPA authority which are likely to be ruled illegal by the SCOTUS within the coming weeks. At the time of writing, prediction markets put a roughly 70% likelihood on SCOTUS ruling against Trump's tariffs. If this happens it will be quite difficult for Trump to replace the Greenland-related tariffs. Also, a potential reason for the limited response is that markets still think the economic impact of the tariffs will prove negligible; we are somewhat more sceptical as to this more lenient take.