The “Fire Sale” of Risk-On Assets Continues Unabated on Escalating US-Europe Trade Tensions

Geopolitical tensions and Japan’s bond yields send shockwaves to fuel the global risk-off trade, but bluff bets also remain.

Key Takeaways

• Greenland Tensions Add Fuel to Metals Rally: The standoff between the U.S. and Europe shows no sign of de-escalation over the Greenland file, and all the while, investors are bailing out of risk assets, bonds, and the dollar — the DXY has sliced back below all of its major trendlines, to the delight of gold and silver, which continue to make all-time highs.

• Uncertainty Rises, but the Bluff Bet Endures: How much uncertainty investors can stomach is a good question, but the resolve in the FOMO and TACO trade (the belief that President Trump is bluffing on Greenland and is only working to secure a “deal”) has proven time and again to be very difficult to break. After all, if there is one thing we know about the Europeans, they are quite capable, as they have shown, of backing down in their tête-à-têtes with President Trump, and he knows that.

• Takaichi’s Fiscal Pivot Sparks a JGB Selloff: The biggest move overnight was in the JGB market, where the 30-year yield has soared +27 basis points to 3.85%! Japan’s super-long 40-year bond yield has pierced the 4.0% threshold for the first time since its debut in 2007. These moves highlight the extent to which investors are souring on this snap election that is promising a food sales tax holiday, which will only make a bad fiscal situation worse. Since Takaichi took office in October, longer-term interest rates have jumped +80 basis points, with obvious spillover effects across the globe.