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Markets are rallying in relief after U.S. President Donald Trump dropped the threat of a trade war with Europe over Greenland. It’s a return of the so-called TACO trade – “Trump Always Chickens Out” – the idea that a market selloff will blunt the president’s more aggressive maneuvers.
It’s an investment thesis that partly explains the generally mild market reaction to the geopolitical risk unleashed during Trump 2.0. But short-term equanimity shouldn’t blind investors to the longer-term shifts. I get into geopolitical risk and what it means for investors both short- and long-term in this week’s Reuters Econ World podcast with Marko Papic, chief strategist at BCA Research. Listen here.
The longer-term shifts from Trump’s use of trade as a foreign policy tool are evident in how supply chains and trade routes have been upended. Chinese exports to the United States slumped 20% in 2025 and its imports from America dropped nearly 15%. But it’s not just China: German exports to the U.S. fell 9% during the first 11 months of 2025 and Boston Consulting Group forecasts the U.S. share of global goods trade could decline from 12% to 9% in the decade through 2034.
Interestingly, even before the Greenland row blew up, respondents to Bank of America’s first monthly global funds survey of 2026, identified “geopolitical conflict” as the biggest tail risk, and their portfolios are brimming with gold to reflect that. But that hasn’t stopped them loading up on stocks, commodities and cyclical bank stocks. In fact, almost half the funds surveyed had not taken out protection against a big stock drawdown over the next three months - the biggest hedgeless count in eight years – and cash levels had never been lower in the 25 years or so of the survey, putting BofA's overall bull-and-bear gauge at what it called "hyper bull".
For the Trump administration, gyrations in the bond market are the ones to watch. Rising Treasury yields further complicate the funding of mounting U.S. debt piles and Trump's housing "affordability" push ahead of November's mid-term congressional elections. His executive order restricting Wall Street investors from buying up single-family homes does little to address tight housing supply, and by potentially boosting demand, could make house price inflation worse.
A jump in Japan's borrowing costs to all-time highs, meanwhile, is a warning shot for DC about investor patience with deficits. Politicians in Japan are jostling to cut taxes ahead of next month’s election in an economy with the heaviest debt burden in the developed world. It’s all very reminiscent of the 2022 collapse in British gilts and a warning for market confidence in Japan's balance sheet.
One source of comfort for U.S. bond investors is the Supreme Court’s apparent reluctance to let Trump fire Federal Reserve governor Lisa Cook. The justices expressed unease about the ramifications for the Fed's cherished independence from political influence if they endorse the Trump administration's arguments that the president acted within his powers in seeking to remove Cook.
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