US stock markets fell sharply Tuesday afternoon as President Donald Trump’s clash with European leaders over Greenland ownership raised concerns about a potential trade war.
The Dow Jones dropped 861 points, or 1.74%, in early afternoon trading. The broader S&P 500 fell 1.96%, and the tech-heavy Nasdaq Composite slid 2.2%. Both the S&P 500 and Nasdaq wiped out their gains for the year.
Stock Market Woes and Growing Trade Tensions
The S&P and Dow were set for their worst day since October, and the Nasdaq faced its worst day since November. The VIX index, known as the “fear gauge,” surged 28%, signaling elevated market volatility.
Investors resumed the “Sell America” trade, pushing the US dollar and bonds lower. The dollar index, which tracks the strength of the dollar against six major currencies, fell 0.9%. It was on track for its worst day since August.
In the bond market, the benchmark 10-year US Treasury yield rose to 4.28%, while the 30-year Treasury yield jumped to 4.91%, both at their highest levels since September.
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A snap election in Japan further rattled markets in Asia, sending Japanese bond yields surging. Prime Minister Sanae Takaichi’s tax cut proposal added to bond market jitters.
US Treasury Secretary Scott Bessent commented, “It’s very difficult to disaggregate what the spillover from Japan is,” and said he was in touch with his counterparts in Japan to calm the markets.
Trump’s Tariff Threat and Market Reaction
Trump’s weekend threat to impose a 10% tariff on imports from eight European countries, including Denmark, the UK, and France, over the Greenland issue added fuel to the fire. The US stock and bond markets were closed on Monday in observance of Martin Luther King Jr. Day, so Tuesday marked the first full day for traders to react to the new trade threats.
George Vessey, lead FX and macro strategist at Convera, stated, “The latest developments serve as a reminder that the US economy is not immune to the uncertainty generated by Trump’s policy shifts.” He also pointed to concerns over the delayed nomination of a new Federal Reserve chair.
European stock markets also took a hit, with the Stoxx 600 index falling 0.7% on Tuesday, after a 1.19% drop on Monday. Denmark’s OMX Copenhagen 20 index, however, rose by 1.13%, recovering from a 2.73% loss on Monday.
Wall Street Braces for Volatility
Investors are unsure how the US-Europe tensions will unfold. “This is one of those be-ready-for-anything weeks as wild cards abound for both US and global markets — most of them POTUS-related,” Ed Yardeni, president of Yardeni Research, warned.
While stock market losses have been significant, they remain relatively contained compared to the turmoil sparked by Trump’s “Liberation Day” tariff announcement in April. Investors are watching closely for a potential off-ramp, including waiting for the US Supreme Court’s ruling on Trump’s use of emergency powers to levy tariffs.
The Court is deliberating on the legality of Trump’s use of the International Emergency Economic Powers Act of 1977 to implement tariffs. A ruling on this issue could affect the president’s renewed tariff threats on imports from some European countries.
Escalating Tensions and Retaliation
Carsten Brzeski, global head of macro at ING, noted that tensions between the US and Europe over Greenland and tariffs are pushing the transatlantic relationship into a “severe crisis.” He added that there is a clear risk of further escalation, with negative consequences for both the European and US economies.
Sarah Bianchi, chief strategist at Evercore ISI, warned that Europe might retaliate, potentially using its “anti-coercion instrument,” also known as the “trade bazooka.” This could target US companies operating in Europe, escalating the situation further.
In safe haven markets, metals soared. Gold futures surged 3.66%, hitting a record high above $4,750 per ounce. Silver futures rose 6.76%, briefly hitting a record high above $95 per ounce.
Trump’s Tariff Strategy
“It’s another geopolitical crisis instigated by President Trump,” Yardeni told CNN. “Markets learned from last year’s tariff crisis that the president uses tariffs as a negotiating tool.”
“Markets don’t like that tariffs are being used as a bully club,” he continued. “If the Supreme Court takes away the bat, markets might rally.”
While markets ended the week lower, the S&P 500 remains about 2.5% from an all-time high.
