Stock markets fell on Tuesday as investors responded negatively to US President Donald Trump’s escalating trade war with Europe over his demand to take over Greenland.
The Morningstar US Market Index fell 1.52% Tuesday morning, while the S&P 500 lost 1.5% and the Nasdaq was down 1.76%. Asian stocks also closed lower on Tuesday after largely resisting the selloff a day earlier.
US stock and bond markets were closed on Monday in observance of Martin Luther King Jr. Day, meaning Tuesday marks the first full opportunity for American investors to react to an unusually news-heavy weekend and escalating trade tensions between the United States and Europe.
“After a strong start to the New Year, the last thing equity markets needed was an act of self-harm by the US administration,” says Michael Field, chief European markets strategist at Morningstar.
Most sectors an were down on Tuesday, and losses were spread across the Morningstar Style Box. The Morningstar US Technology Index fell 1.89% and the Morningstar US Consumer Cyclical Index was down 2.02%. The Morningstar US Growth Index is down 1.63% so far on Tuesday, making it the worst performer in the Style Box.
The exception came in the form of energy stocks. The Morningstar US Energy Sector Capped Index has edged up 0.09% so far on Tuesday. The index is up 6.54% in the year to date on a total return basis through Friday’s trading.
In Europe, the Morningstar Nordic Index continued lower on Tuesday, extending losses to 3.1% for the week. The Morningstar Europe Index was down 2.5%, while the Morningstar UK Index declined 1.4%.
Trump’s New Tariff Threats
The losses came after President Trump said the US would impose new tariffs on imports from European countries unless they acquiesce to a change in control of Greenland. Trump said that Denmark, which has sovereignty over the island, will face a 10% tariff starting Feb. 1. The same levy would apply to Norway, Sweden, France, Germany, the United Kingdom, the Netherlands, and Finland, with the rate set to rise to 25% in June if no agreement is reached.
Trump further escalated his rhetoric on Tuesday, threatening 200% tariffs on French wine and Champagne after reports that French President Emmanuel Macron would not join his proposed Gaza Peace Board. He also lashed out at the UK over plans to hand sovereignty of the Chagos Islands, which host a UK-US military base, to Mauritius, calling the move an “act of great stupidity” and citing it as further justification for acquiring Greenland.
“Markets have taken the prudent approach to the news and retreated, but this is not some well-planned economic land grab. Rather, it’s a wild response to Europe’s pushback on Greenland,” says Morningstar’s Field.
Trump’s threats come as the US Supreme Court is considering the legality of his use of tariffs under the International Emergency Economic Powers Act.
As investors worldwide assess how tensions between the US and Europe may unfold, MUFG senior economist Henry Cook says the last year has taught markets not to overreact to Trump’s threats. He highlights the legal challenges: “As ever with Trump, the details are thin on the ground. It’s not clear what legal framework would be used, nor how this would relate to the existing US reciprocal tariffs.”
Gold and Silver Extend Gains as US Dollar Weakens
Commodity markets reflected the broader risk-averse mood, with rising concerns over a potential trade war between the US and the European Union driving demand for safe-haven assets. Gold and silver traded near record highs in morning dealings, at around $4,712 and $94 per ounce, respectively.
At the same time, the US dollar continued to weaken, providing additional support to precious metals. The euro was quoted at $1.17 in afternoon trading against $1.16 on Monday.
Countering the trend among safe-haven assets, long-term US Treasury prices fell, with the yield on the US Treasury 10-year note rising to 4.28% from 4.24% on Friday.