Markets slump as Greenland, Japan fears shake up torpid trading

TOKYO – As financial markets settled into an unusual state of tranquility, with stocks slowly grinding higher week after week and bond yields hovering in narrow ranges, many on Wall Street started to prepare for a sudden jolt.

On Jan 20, it came.

US benchmark stock indexes sank more than 2 per cent, the dollar slid against most major currencies and 30-year bond yields climbed toward 5 per cent as

President Donald Trump’s latest push to take over Greenland rippled through markets.

His threat to slap new tariffs on European allies – combined with a plunge in Japanese debt – boosted measures of price swings from historically low levels. 

This week is shaking up the status quo in part by reigniting concern that foreigners will dump US assets in response to trade friction as the Greenland tension heats up. It is the same fear that triggered a deep slump in US markets and a huge spike in volatility after Mr Trump announced his sweeping levies in April.

“It has opened up a tail risk – that people don’t want US assets,” said Mr Shiyan Cao at hedge fund Winshore Capital. “You have to put on some risk premium for political reasons.”

As markets sold off, the VIX Index, a measure of expected stock-market swings, touched the highest since November. So did a JPMorgan Chase gauge of currency volatility. Gold – a traditional haven – reached a record high.

For Mr Cao, volatility remains too low relative to his models based on economic indicators, such as the level of policy rates, inflation and growth.

“Everyone is waiting for the next shoe to drop – and there are many shoes in the pipeline,” he said.

More risks are ahead for markets, centered around the Supreme Court, which will hear arguments over Mr Trump’s bid to fire Federal Reserve governor Lisa Cook. 

Wells Fargo warned this month that a ruling allowing the dismissal would amount to a tangible action against the central bank’s independence, triggering losses in bonds.

Hedging time

There are signs that traders are hedging against more turbulence. In Treasuries, options flows featured buying of contracts targeting a leap in the benchmark 10-year yield to around 4.35 per cent – a level last seen in August – from about 4.29 per cent now.

The tandem sell-off in fixed income and equities is a worrisome sign for Mr Michael Thompson, co-portfolio manager at Little Harbor Advisors.

“In our opinion, today’s risk-off move is more of the systemic-type move, not idiosyncratic, which to us suggests it is a good time to begin accumulating hedge positions,” he said.

One does not have to look very far back for examples of punishing breakouts following periods of serenity. 

In April, for instance, when markets convulsed after Mr Trump announced sweeping tariffs. Or in 2024, when an abrupt rally in the yen obliterated a popular hedge-fund trade that was once again proving a winner amid the stretch of calm.  

Up until last week, plenty of market-watchers saw no end in sight to the moribund price movement, even amid a dizzying series of events, including the US capture of Venezuela’s president. For them, reports on December jobs and consumer prices confirmed the view that inflation is cooling enough and the employment picture soft enough for the Fed to lower rates perhaps twice more in 2026. 

As Vanguard’s Sam Martinez sees it, that backdrop still holds, suggesting volatility may recede.

“Geopolitical shocks typically take time to unfold and often have their greatest market impact early on, when the tone skews more extreme,” said the senior client portfolio manager. 

“Over time, these positions tend to moderate as the economic costs of a harsher stance come into focus,” Mr Martinez said. “There is no reason to believe the current situation won’t follow a similar pattern, but we will continue to monitor developments closely and adjust as needed.”

‘Impossible’ threat

There is also the question of whether investors can unload US assets wholesale. 

Danish pension fund AkademikerPension announced it will exit US Treasuries by the end of the month amid concerns that the Trump administration has created credit risks too big to ignore. But the fund’s holdings of the bonds are relatively tiny at around US$100 million, and some say it will be hard for many to follow suit.

“Diversifying away from America is impossible,” UBS chief executive Sergio Ermotti said in a Bloomberg Television interview at the World Economic Forum in Davos, Switzerland, on Jan 20. “The US is the strongest economy in the world.”

Investors will be watching some of the go-to strategies that benefit from low volatility. One of the best known is the so-called carry trade, where investors borrow in low-yielding currencies – like the yen – to buy those offering a higher payout, especially in emerging markets. A Bloomberg measure of the trade just rounded out its best year since 2009, earning almost 18 per cent, and expectations have been high for it to deliver this year as well.

The yen was little changed on Jan 20, while emerging assets slipped after weeks of showing resilience in the face of geopolitical tensions.

One reason volatility had been subdued was that traders have largely learned to tune out Mr Trump’s daily salvos, wagering that the worst of his threats will not come to pass. The tactic, honed after the April market meltdown drove him to pause his tariffs, became known as the TACO trade – with investors seeing sell-offs as a chance to buy.

At Jefferies, strategist Mohit Kumar speculated that a deal will eventually be struck that defuses the tension over Greenland. Yet that could take months, leaving the markets facing heightened volatility in the meantime. 

“Beneficiaries of the rise in geopolitical tensions would be defence stocks, financials and gold, and we are long these in our portfolio,” he wrote. BLOOMBERG