Markets and the Greenland Gambit

Editors’ Note: MarketMinder is politically agnostic. We prefer no political party nor any politician and assess developments for their potential economic and market effects only.

Catching up after a three-day weekend is never the most pleasant task, but markets had an especially rough go of it Tuesday, with the S&P 500 falling -2.1% as stocks digested President Donald Trump’s weekend threat to hit nations opposing his Greenland ambitions with new tariffs.^[i] To the world it looks like novel geopolitical territory, but we think timeless investment principles apply: Tune down the rhetoric, turn off your political biases, and remember that markets digest widely known information quickly and move ultimately on the gap between reality and expectations.

To be clear, we aren’t saying the market is “wrong” for declining Tuesday. Markets hate rising uncertainty, and it is fair to say uncertainty is flaring now. Trump has threatened a 10% tariff on the UK, Norway, Sweden, Denmark, France, Germany, the Netherlands and Finland, effective February 1. He threatened to hike that further to 25% if no deal for the US to buy Greenland is struck by June 1. These rates would stack on top of all prior tariffs, bringing the blanket tariffs to 25% on EU goods and 20% on UK goods in February if it indeed takes effect. UK rates will be even higher than that headline, since last year’s blanket tariff stacked on top of extant tariffs under the World Trade Organization’s Most Favored Nation trade schedule. For US businesses and consumers importing from Britain, ouch. Adding to the pain, the EU has threatened broad retaliation, rekindling trade war fears that hit markets early last year. And while a Greenland deal is the aim and tariffs purportedly a means to an end, it is impossible to know how talks will go. That is a lot for stocks to wrap their (proverbial) heads around. In these situations, step one tends to be pricing in the worst-case scenario.

But scale is important. The US imported about $308 billion annually from these nations in 2024 (the last full year available), a sliver of total trade.^[ii] And applying the headline tariff rates to estimate the added cost may prove too simplistic, given the reams of exemptions embedded in last year’s trade deals and tariff announcements. So you probably can’t divide $308 billion by 12, then apply a 10% tariff rate for four months and 25% for seven to get an added cost of about $55 billion in 2026. We mean, math says you can, but reality is complicated and could prove milder.

The pending Supreme Court ruling on last year’s blanket and reciprocal tariffs is another wildcard. To date, Trump hasn’t said what the statutory basis for these new tariffs would be. There is no Executive Order clarifying the specifics or legal underpinning. This is critical, because if the Supreme Court rules against using the International Emergency Economic Powers Act (IEEPA) to justify tariffs, that basis goes out the window. The other tariff levers the White House could pull instead, including Section 232 (national security concerns) are narrower and require a more formalized investigation process before they can take effect. Rumor has it the Supremes will issue its decision soon, but Tuesday marks the third time the Court has dashed widespread hopes for tariffs to be in its batch of new rulings. Observers now generally point to February, which is a little awkward given the Greenland-related threats.

But between the Court ruling, exemptions and the diplomatic process, it isn’t guaranteed tariffs take effect and look exactly as everyone fears. So high as uncertainty is now, there is room for it to ease and for reality to go better than feared—true of both the US tariffs and the EU’s mooted retaliation. In this way, the scenario looks like a small-scale version of what unfolded after Liberation Day last year.

Some argue the real threat here isn’t tariffs, but in the EU’s purported leverage over US Treasury markets. We saw oodles of headlines Tuesday noting EU entities (including pension funds) own about $8 trillion worth of US Treasury bonds, and that the bloc’s leaders could flex their financial muscles by selling and spiking Uncle Sam’s borrowing costs. One Danish pension fund’s decision to sell about $100 million of US Treasurys Tuesday is allegedly the tip of the iceberg.

Yet overall, the bark here looks a lot worse than the bite. Setting aside the diplomatic underpinnings, this is a reheated version of old fears about China selling its US Treasury holdings and the dollar losing its reserve currency status. And the same rebuttal applies: There is no comparison or replacement for the size, depth and liquidity of US bond markets. Japan famously has a lot of debt, but the Bank of Japan owns most of it. The EU’s sovereign bond market is about €12.6 trillion, but the ECB and national central banks also own a big chunk, due to their quantitative easing programs, as do pension funds.^[iii] Pensions have very strict mandates, and selling down US Treasury holdings would require replacing them with comparable securities. There is a severe supply issue blocking this. And if some did sell? To the extent a supply surge caused volatility, investors elsewhere would probably be all too happy to snap up their favorite Treasury asset at a discount (and higher yield).

So we suggest taking a deep breath and remembering how markets work. As Ben Graham quipped, in the short term, markets behave like voting machines. They register feelings, knee-jerk reactions and worst-case scenarios. As time rolls on, markets behave more like weighing machines, moving more gradually on how reality shapes up relative to those initial expectations. So while volatility could well continue in the near term, we see plenty of room for falling uncertainty and milder-than-feared outcomes to provide relief for stocks to weigh.