Markets rally as Trump drops tariff threats on Greenland and Europe

Summary:

Markets surged after Trump dropped tariff threats on Greenland and Europe, lifting European and U.S. equities, easing volatility, boosting financials and autos, while gold fell as investors unwound safe-haven positions.

Relief rally sweeps through European markets

European equities enjoyed a strong session as investors welcomed the easing of trade tensions. The FTSE 100 climbed roughly 0.6%, while the broader STtoxx 600 gained around 1% as risk appetite returned to markets.

Germany's DAX 40 outperformed with a 1.2% advance, supported by strength in the automotive sector. Financials also contributed to the rally, benefiting from the improved sentiment and easing concerns about potential trade disruptions.

The shift came after Donald Trump indicated a framework deal on Greenland had been reached and confirmed planned tariffs on European allies would not proceed. This represented a significant reversal from recent rhetoric that had unsettled markets.

However, traders remained cautious about reading too much into the move. Denmark ruled out any change in Greenland's sovereignty, and limited detail on the framework left room for uncertainty about the sustainability of this more conciliatory tone.

UK assets supported by easing trade fears and fiscal data

Sterling traded broadly flat against the US dollar despite the improved risk environment, reflecting ongoing caution about United Kingdom (UK) economic prospects. The pound has struggled to build momentum even as some external headwinds have eased.

UK gilts strengthened, particularly at the long end of the curve, as investors digested both the shift in trade policy and better-than-expected public finance data. The combination provided modest support for UK fixed income assets.

December's budget deficit narrowed more than economists had forecast, supported by stronger tax receipts. While one month's data rarely changes the bigger picture, it offered some respite from concerns about the UK's fiscal position.

Corporate news creates individual winners and losers

Beazley shares slipped after the insurance group rejected a £7.7 billion takeover approach from Zurich. The board deemed the offer significantly undervalued the business, suggesting any potential deal would require a materially higher price.

B&M European Value Retail suffered another setback, with shares falling after the discount retailer cut profit guidance once more. This marked the second downgrade in recent months, despite management pointing to signs of improving trading in December.

Wall Street posts strongest gains in two months

United States (US) equities ended sharply higher, reversing Tuesday's selloff as Trump's comments on tariffs lifted sentiment. The Dow Jones rose 1.21%, while the S&P 500 gained 1.16% and the Nasdaq 100 climbed 1.18%.

The S&P 500 logged its biggest one-day advance in two months, with all sectors finishing in positive territory. Energy shares led the way, while the regional bank index surged 4.7% to its highest level since November 2024.

Positive earnings from large and regional lenders provided additional momentum for financials. United Airlines also advanced after issuing an upbeat outlook for the first quarter (Q1) and full year, suggesting some resilience in consumer spending.

Safe havens unwind as risk premiums ease

The VIX volatility index fell back as equity markets stabilised. This suggested traders were becoming less concerned about near-term market disruptions, at least for now.

US Treasuries caught a bid despite the risk-on move in equities, reflecting continued demand for quality assets. Gold retreated roughly $100 from its record high as geopolitical risk premiums eased following Trump's comments.

The unwinding of safe haven positions highlighted how quickly market dynamics can shift when political rhetoric changes. However, experienced traders know these moves can reverse just as rapidly if new concerns emerge.

Global markets felt the spillover effects, with European equity futures rising more than 1% and Asian shares advancing. The euro slipped back below $1.17, while markets continued to price around 45 basis points of US rate cuts this year.

Source: ig

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