On Thursday, Trump publicly walked back these threats, explicitly ruling out the use of force against Greenland and softening his tone on trade. Speaking after a meeting with NATO Secretary General Mark Rutte, he emphasized that cooperation with Western Arctic allies could address U.S. concerns regarding missile defense and access to critical minerals. Although no concrete policy framework was announced, the change in tone was enough to shift market expectations.
Financial markets reacted swiftly to Trump’s remarks. Equity markets rallied globally as investors reassessed geopolitical risk. Wall Street saw a strong rebound, with the S&P 500 posting its largest daily gain in two months, while European equity futures rose sharply during Asian trading hours. Gains were also recorded across Asia, with Japanese and Australian markets advancing and South Korea’s Kospi index crossing the 5,000-point level for the first time, reflecting renewed investor confidence and improved risk appetite.
In currency markets, the U.S. dollar strengthened as demand for defensive positioning eased. The euro slipped back below the $1.17 level, while the Japanese yen remained under pressure, reflecting continued yield differentials and cautious expectations surrounding Bank of Japan policy. The Australian dollar stood out, climbing to multi-month highs after domestic employment data showed stronger-than-expected job growth and a decline in the unemployment rate.
Gold prices fell sharply from recent record highs as investors reduced their exposure to safe-haven assets. The decline reflected a perception that the immediate risk of a geopolitical confrontation between NATO allies had diminished. However, market participants remained cautious about fully abandoning gold positions, given the broader environment of political unpredictability and lingering inflation concerns.
Bond markets also stabilized. U.S. Treasury yields edged lower as demand recovered following a week of heavy selling, while the VIX volatility index fell back toward baseline levels, signaling reduced market anxiety. Japanese government bonds were steadier after an exceptionally volatile period driven by concerns over election-related fiscal expansion and rising yields.
Attention now turns to key macroeconomic developments. In the United States, upcoming core PCE inflation data will be closely watched as markets continue to price in two interest rate cuts later this year. Any upside surprise in inflation could challenge these expectations and reintroduce volatility.
In Japan, the Bank of Japan began a two-day policy meeting with rates expected to remain unchanged. Nevertheless, a hawkish tone is anticipated, potentially signaling further normalization of monetary policy in the future. This has kept pressure on the yen despite the day’s calmer market conditions.
In the short term, improved risk sentiment supports equities and risk-sensitive currencies while weighing on gold and volatility measures. Over the medium term, however, geopolitical uncertainty is likely to remain structurally embedded in markets, particularly as U.S. foreign policy continues to be shaped by transactional rhetoric and abrupt shifts in communication.
More broadly, this episode underscores how modern financial markets are increasingly driven by political signaling as much as by economic fundamentals. While markets may grow adept at discounting rhetoric, repeated episodes of escalation and retreat reinforce the need for hedging strategies, ensuring that assets like gold continue to play a role even during periods of apparent calm.
The market reaction highlights a recurring dynamic in Trump-era politics, often captured by the informal “TACO” narrative, which reflects investor beliefs that Trump’s most extreme threats are often softened or reversed. While this perception has reduced the lasting impact of political shocks, it has not eliminated volatility. Instead, markets now react rapidly to shifts in tone, treating political statements themselves as tradable events.
Importantly, while Trump’s comments removed the immediate tail risk of a direct confrontation within NATO, uncertainty remains. The absence of concrete agreements regarding Greenland, Arctic security, or critical mineral access suggests that the issue could re-emerge. As a result, investors have moderated, rather than abandoned, their defensive positions.
With information from Reuters.
