Risk sentiment recovers, as markets more sensitive to tariffs than geopolitics

The European stock market is a sea of green this morning, and gains have extended since the open after President Trump backed down on his threat to add tariffs to European nations, including the UK, who had sent troops to Greenland.

Luxury stocks come roaring back as Trump backs away from tariffs, and Burberry results cement a positive outlook

The price action is a reversal of most of what we saw unfold earlier in the week. European stocks are higher by more than 1% led by tech giant ASML, luxury stocks are also higher with LVMH and Hermes top performers today, both are higher by approximately 2%. The strong rally in US stocks late on Wednesday when news of the reversal on tariffs broke saw the S&P 500 move back into the green for YTD gains, the Nasdaq is set to do the same later today.

Trade wars are the biggest concern for markets

The tariff risk is now on the back burner, and this week’s price action tells us that financial markets fear tariffs more than geopolitical risks. The terms of the deal that Nato have agreed with the US around Greenland are unknown, but the Nato Secretary General said that it did not involve Greenland’s sovereignty. Thus, Greenland is not about to become the 51^st US state. Although we still do not know what involvement the US will have in Greenland, that is enough to generate a celebratory mood for markets.

Market fundamentals remain strong

There is still a way to go before markets reverse overall losses for this week, the Eurostoxx 50 index remains lower by 1.5% in the past 5 sessions. However, the selloff in recent days sent a jolt of volatility through financial markets, but it did not lead to a rout. This suggests that investors remains 1, dip buyers during Trump’s expansive foreign policy and 2, the fundamentals for markets remain strong.

Defense stock sell off to be temporary

Defense stocks are some of the weakest performers in Europe today and Rheinmetall is down 1.8%, Babcock in the UK is also lower by more than 1%, as the military threat to Greenland is lowered. We think this sell-off in defense names will be temporary, as defense is still one of the most powerful themes in European equities right now. Also, we do not know the terms of the US/ Greenland deal, which will still involve a ramp up of European defense spending in the coming years.

Added to this, the existential threat to Nato still exists, and Trump could turn on his allies in the future. For now, that risk has been kicked down the road, but the fact that the gold price remains elevated, suggests that there is still demand for safe havens, and gold remains above $4,800 per ounce.

Bond market recovery continues

Away from President Trump, the global bond market sell off that was sparked by fears about fiscal expansion in Japan has continued to recover. Bond yields are down across the board today and the UK is leading the way. Gilts have been soothed by news that the UK’s December borrowing was £7bn lower than last year. Although the UK’s borrowing is still elevated, and above 2023’s figure, it has aided the bond market recovery in Europe this morning. The UK has still borrowed £140bn in the past year, and debt interest is almost double what the UK spends on defense. If the US wants Europe to spend more on defense the easiest way would be to fund some of the continent’s debt.

Investors still shun the dollar

The dollar and the yen continue to be the weakest currencies in the G10 FX space this week. An easing of fiscal fears and geopolitical risks have done nothing to boost the attractiveness of these two currencies. Although the Swissie has dropped back from the top spot in the G10 FX space this week, it continues to extend gains vs, the USD, suggesting that the FX market is not willing to give up its safe havens yet.

Natgas rally continues, but could be close to the top

The commodity space remains a hive of activity away from the drama caused by President Trump. The oil price is tumbling on Thursday, yet Natgas is higher by another 9%, bringing its gains this week to a stunning 70%. Cold weather that threatens gas production in Texas is driving the move higher. However, it is worth noting that Natgas is getting close to the high from March last year and could pull back from this level. This commodity is notoriously volatile, and if the weather heats up in the US and Europe, then it could reverse course very quickly.

The Buy America trade is back

Ahead today, the focus will be on whether US stocks can extend gains for another day after President Trump made the case for the ‘Buy America’ trade at the Davos summit on Wednesday. So far, US equity market futures are pointing to strong gains on for another day, with the Nasdaq expected to rise 0.8%. There is also US economic data to watch later today, including the final reading of Q3 GDP and the core PCE report, the Fed’s preferred measure of inflation, for November.