Will it be the "maximum pressure, last-minute compromise" playbook again? The market "knows" Trump well.

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In response to U.S. President Trump’s threat to use tariffs as leverage to force the purchase of Greenland, global markets have shown risk-averse sentiment, but the reaction has been relatively restrained. Analysts believe this is just Trump’s usual “maximum pressure” negotiation strategy, and that ultimately both sides will reach some form of compromise.

Over the weekend, Trump threatened to impose tariffs on the UK, France, Germany, and other European countries to force Denmark to surrender Greenland. U.S. markets were closed overnight, S&P 500 futures fell just over 1%, European stocks dropped by a similar amount, and gold rose by less than 2%.

According to The Wall Street Journal, these fluctuations are far less than what would be expected during a catastrophic event—the S&P 500 has experienced similar drops 21 times per year on average since 1964, and gold futures have seen similar gains 15 times per year on average since 1979, meaning the market has not shown signs of panic.

Analysts believe this geopolitical deadlock may follow Trump’s usual script of “escalate then de-escalate”. Rich Privorotsky, head of Goldman Sachs’ Delta-One division, noted his baseline scenario is that Trump will strike a compromise at the last moment. He pointed out that this position is not popular domestically, as polls show only 17% of Americans support efforts to buy Greenland, and an overwhelming majority of both Democratic and Republican voters oppose using force to annex the island.

The Four Factors Behind Market Reaction

According to Wall Street Journal analysis, investors’ mild reaction to the Greenland incident can be attributed to four factors. First, markets may be desensitized to Trump’s rhetoric. When Trump introduced “reciprocal” tariffs last April the reactions were more intense, but the economy ultimately performed well, corporate investment increased, and although inflation rose slightly, it was still below levels at Trump’s inauguration by year-end.

Second, this may be a revival of the “TACO trade”—betting that Trump will always back down at the last minute. Although some of his policies were implemented, it’s difficult to tell when he’s serious and when he’ll compromise. Even if he is serious, Congress does not support this idea, and the Supreme Court may soon rule his tariff measures illegal.

Third, investors may see potential gains. Alarmed Europeans will sharply increase military spending, European defense stocks surged Monday, and local utilities benefited from safe-haven inflows. If European governments increase spending, this benefits shareholders.

Fourth, the new world order is hard to imagine, and investors may choose to ignore it because it’s hard to price this scenario. There are historical precedents—after the assassination of Austrian Archduke Franz Ferdinand in 1914, investors ignored it for almost a month until war broke out. After the new Russian government declared a debt default in 1918, Russian bond prices actually rose for months.

Betting on a “Last-Minute Compromise”

Goldman Sachs analysis suggests markets are not panicking largely because investors see Trump’s threats more as a negotiation posture.

Rich Privorotsky, head of Goldman Sachs’ Delta-One division, said the current situation fits the known negotiation strategy: if the U.S. goal is more about mining rights, an expanded military presence, or a unified Arctic alliance, then this maximum pressure is meant to get the most favorable terms at the negotiating table.

Moreover, domestic political factors in the U.S. limit aggressive action. Privorotsky pointed out that this is a midterm election year, so adopting unpopular policies carries high risks. A Reuters/Ipsos poll shows only 17% of Americans support Trump’s push to acquire Greenland, and a vast majority of Democrats and Republicans oppose using force to annex the island.

The timing of this event is also intriguing, coinciding with Davos week. Privorotsky believes this is no coincidence and further proves this is likely a carefully planned gambit.

Meanwhile, the U.S. Congress does not support the idea, and the Supreme Court may soon rule on the legality of Trump’s tariff strategy. All these factors lead investors to treat the tariff threat as a short-term disturbance, and even bet that Trump, as before, will “chicken out” at the last moment.

Risk warning and disclaimerMarkets involve risks; investment requires caution. This article does not constitute personal investment advice and does not take into account the individual user’s specific investment objectives, financial situation, or needs. Users should consider whether any opinion, viewpoint, or conclusion expressed here fits their particular situation. Investment is your own responsibility.

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