- Donald Trump has threatened to impose 10% tariffs from February 1 on goods from eight European countries: Denmark, Norway, Sweden, France, Germany, the Netherlands, Finland, and the United Kingdom. The tariff threat has been explicitly linked to a demand that the United States be allowed to purchase Greenland.
- Europe is pursuing a dual-track response: political leaders are attempting to de-escalate tensions, while EU institutions are simultaneously analyzing potential countermeasures, including the use of the Anti-Coercion Instrument (ACI).
- According to Charu Chanana, Chief Investment Strategist at Saxo Bank, markets have interpreted the situation less as a simple “sell Europe” signal and more as a U.S. political and institutional risk. The dollar weakened, traditional safe havens outperformed, and gold and silver reached all-time highs.
What happened?
Over the weekend, President Trump threatened another round of tariffs on goods from Denmark, Norway, Sweden, France, Germany, the Netherlands, Finland, and the United Kingdom. Media reports suggest tariffs of 10% starting February 1, with the possibility of further increases later on.
Crucially, the tariff threat has been tied to a demand that the United States be allowed to buy Greenland, making this dispute fundamentally different from a classic trade conflict driven by trade balances or industrial policy. Instead, it resembles geopolitical bargaining, which significantly widens the range of possible outcomes and makes them less linear.
This distinction matters for markets. Scenarios now range from negotiations and delays to sudden escalation, and in such environments investors tend to aggressively price the risk of abrupt, headline-driven market moves.
Europe is trying to avoid escalation, while also signaling it will not remain passive.
- EU ambassadors agreed to intensify diplomatic efforts aimed at discouraging the U.S. from escalating.
- European leaders have scheduled further coordination, including a summit later this week.
- At the same time, discussions are ongoing about potential retaliation, including reactivating a large package of suspended tariffs and possibly deploying the Anti-Coercion Instrument (ACI)—a tool designed for situations in which the EU believes it is facing political or economic pressure.
Key dates and potential catalysts
The critical issue for markets is the transition from rhetoric to actual policy decisions, which makes specific dates particularly important.
- February 1 – the proposed start date for the 10% tariffs.
- World Economic Forum in Davos – President Trump is scheduled to speak on Wednesday, which could mark a turning point in tone, either toward de-escalation or further escalation.
- EU summit on Thursday – investors will be watching whether the EU limits itself to conventional retaliatory tariffs or moves closer to formally activating the ACI.
- June 1 – a potential date mentioned for raising tariffs to 25%, should tensions escalate.
For Europe, the distinction between merely referencing the Anti-Coercion Instrument as a political signal and actually triggering it is critical—and markets are keenly aware of the difference.
How are markets reacting?
As Chanana explains, the core problem is that tariffs are now being used as leverage across a wide range of political issues, not just trade. This makes the risk premium more persistent, because the distribution of outcomes is broader and harder to hedge.
Notably, the current market reaction resembles a risk-off move without the usual dollar strength, combined with relative stability in the euro. This suggests investors see the situation as a geopolitical and institutional shock centered on the United States, rather than a straightforward threat to European growth.
- The U.S. dollar weakened, while capital flowed into classic safe havens such as the Japanese yen and Swiss franc—a pattern more consistent with “U.S. uncertainty” than a purely European shock.
- Gold and silver sent the strongest signal: both metals hit new all-time highs on Monday. Spot gold traded near USD 4,600, while silver approached USD 90, briefly breaking above previous intraday records.
- Risk assets looked fragile, amplified by thin liquidity as U.S. markets were closed for MLK Day, a condition that often exaggerates price moves which may partially reverse once full liquidity returns.
What next? Three scenarios and their implications
The following scenarios and probability estimates represent the author’s opinion for discussion purposes only and do not constitute a forecast or investment recommendation.
- Base case (50–60%)
The threats are primarily a negotiating tactic. Talks begin, and the outcome is either a partial rollback of tariffs or a delay. In this scenario, maintaining only modest hedges makes sense, as the cost of protection could be high if tensions ease quickly. - Negative scenario (30–40%)
The 10% tariffs take effect on February 1, and Europe responds with measured retaliation. Investors may increase hedging of European risk, favor high-quality and defensive stocks, and reduce exposure to export-heavy sectors. - Tail-risk scenario (10%)
Retaliation expands to services, public procurement, or capital flows, turning the conflict into a structural rather than episodic one. Cross-market correlations rise, geographical diversification becomes less effective, and explicit tail-risk hedges and a higher allocation to safe assets become necessary.
The familiar “TACO” narrative (“Trump Always Chickens Out”) may still dominate, as markets have repeatedly seen tariff threats softened, postponed, or used purely as negotiating tools. This mindset can limit short-term damage. The risk, however, is overconfidence: if real measures are implemented this time, price corrections could be sharper because positioning has leaned too heavily toward the assumption that “it will all blow over.”
How to position?
1. Commodities: precious metals as a hedge against political uncertainty
Base case:
Gold and silver, already at record highs, are being treated as preferred hedges against political uncertainty and institutional risk. They may remain supported as long as the narrative centers on political instability rather than pure growth dynamics.
Key risk:
After reaching record levels, metals are vulnerable to sharp corrections following de-escalation headlines or a rise in real yields. Entering without defined risk parameters could be painful.
2. FX: trading the “U.S. uncertainty” channel
Base case:
If headlines deteriorate, markets may express risk aversion through stronger JPY and CHF, while the USD does not necessarily function as an automatic hedge during periods of U.S. political risk.
Key risk:
A rapid calming of tensions could trigger a swift return of capital to the dollar and a sharp compression in volatility.
3. Equities: from broad market exposure to selectivity
Base case:
If tariffs remain a credible threat, European markets may show greater dispersion—across countries and sectors. Indices in countries explicitly named in the tariff threat may react faster, while “off-list” markets could initially appear more resilient. Export-oriented and cyclical sectors are more headline-sensitive, while defensive sectors and those carrying a “geopolitical premium” may outperform.
Key risk:
“Off-list” does not mean immune. If the conflict broadens into a full EU-U.S. confrontation, correlations will rise and seemingly safer markets will be pulled in with a lag. Conversely, a rapid de-escalation could drive a return to broad beta, hurting defensives while exporters rebound sharply.
4. Bonds: using yields to assess whether risk is U.S.-centric
Base case:
If markets treat the situation as a U.S. institutional risk, demand for safe assets may rise even alongside a weaker dollar. Yield movements help distinguish between classic risk-off behavior and dollar weakness driven by other factors.
Key risk:
Yields may react strongly to unrelated drivers—such as inflation data or central-bank commentary—making it harder to attribute moves solely to tariff risk.
5. Volatility: protection against sudden moves
Base case:
When markets are driven by politics, prices can gap sharply. In such environments, limited-risk instruments may be more appropriate than stop-loss orders, which can fail during price gaps.
Key risk:
If news flow stabilizes, hedges can lose value quickly, making both timing and position sizing critical.
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Source: ceo.com.pl
