Trump’s “modus operandi” is a déjà vu for markets
26 JAN, 2026
Following a rise in tensions surrounding Greenland, the tone eased after Donald Trump’s speech in Davos, in which he announced the suspension of planned tariff increases, the start of talks with NATO, and the scheduling of a tripartite meeting on Ukraine.
In Europe, the French government resorted to the Article 49.3 “guillotine” mechanism to pass its 2026 budget bill. The budget projects a deficit of around 5% this year, a less ambitious target than initially planned.
Against a backdrop of growing geopolitical fragmentation, Beijing is seeking to position itself as a stable partner, strengthening its diplomatic and trade ties, particularly with Canada and Europe.
Geopolitical tensions and market reaction
The resurgence of tensions around Greenland, following Denmark’s refusal to sell the island to the United States, reignited fears of a transatlantic trade war. Donald Trump threatened to impose new tariffs on the European Union, including an additional 10% from February 1—and potentially up to 25% by June—on the eight countries participating in joint military exercises in Greenland.
France was threatened with 200% tariffs on wine and champagne after Emmanuel Macron declined to join Donald Trump’s Board of Peace, his proposed alternative to the UN. Brussels considered several responses, including suspending last summer’s trade agreement, imposing €93 billion in import duties on U.S. products, and potentially activating its anti-coercion instrument.
As a result, risk assets wavered, and sovereign bond yields rose amid concerns over inflation and higher defense spending.
Davos de-escalation and market relief
However, Donald Trump softened his rhetoric in Davos, stating that military intervention would not be necessary. He said he had held constructive talks with the NATO Secretary General on Greenland and cancelled the planned tariff hikes scheduled for February 1.
At the same time, a meeting between the United States, Ukraine, and Russia was announced to discuss peace in Ukraine, a sign of geopolitical easing that helped risk assets rebound. Gold prices pulled back, although later in the week they once again approached the $5,000 per ounce mark.
Tensions also eased around the Federal Reserve, after Supreme Court hearings appeared to confirm a favorable ruling to keep Lisa Cook on the Board. On the macro front, November PCE inflation came in in line with expectations, while Q3 GDP growth was revised upward to 4.4%.
Europe and Asia developments
In Europe, the French government used Article 49.3 to secure approval of its 2026 budget, which forecasts a deficit of around 5%, again less ambitious than initially planned.
In Asia, Japan’s Lower House was dissolved ahead of snap elections. Government bond yields rose, with the 40-year bond reaching a record high above 4%. In response to market concerns, authorities sought to reassure investors by stating that new measures would not be financed through additional debt. The Bank of Japan kept interest rates unchanged while forecasting robust growth and inflation close to its 2% target.
In China, Q4 growth reached 4.5%, allowing the country to meet its annual growth target of 5%. Amid increasing geopolitical fragmentation, Beijing continues to position itself as a stable partner, strengthening diplomatic and trade ties, particularly with Canada and Europe.
Investment outlook
We maintain a constructive view on equities, with a preference for Japan and emerging markets. Latin American countries are benefiting from the strong momentum in commodities, while China’s strategic positioning also provides support to the region.
Given rising fiscal risks, we remain cautious on the long end of the yield curve, while maintaining a more positive stance on short maturities, particularly in the United States. We continue to favor emerging market debt, supported by a weaker dollar, declining short-term rates, and the return of capital flows. In corporate credit, current investment-grade valuations have led us to slightly reduce our exposure.
European markets
Market trends were shaped by an escalation of tensions between Donald Trump and the European Union, with Q4 earnings as the backdrop.
On the corporate front, several companies announced job cuts, including BNP Paribas following the integration of AXA IM, Société Générale, and Capgemini, which plans to cut 2,400 jobs due to the acceleration of AI and persistent weakness in certain sectors.
By contrast, the healthcare sector advanced on encouraging signals. Novartis’ CEO stated that the group should be shielded from U.S. tariffs thanks to higher inventories in the U.S. and an agreement with the Trump administration. Novo Nordisk rose on exceptional demand for its weight-loss drug Wegovy, while Johnson & Johnson reported better-than-expected results, with rising sales and 2026 guidance above consensus. In the luxury sector, Burberry also beat expectations as it regained traction in China. The AI theme continued to gain momentum, with ASML indicating a stronger-than-expected end to 2025 and upgrading its near-term outlook due to a pickup in orders from China.
U.S. markets
Wall Street experienced heightened volatility during a shortened week due to the Martin Luther King Day holiday, and indices closed mixed. Markets rebounded on Wednesday and Thursday after Tuesday’s sell-off, the worst for the S&P 500 and Nasdaq since last October. The S&P 500 fell 0.38%, the Nasdaq declined 0.86%, while the Dow Jones rose 0.18%. The Russell 2000 stood out with a 1.53% gain, marking 14 consecutive sessions of small caps outperforming the S&P 500, a streak not seen since 1996.
Year to date, mid- and small-cap stocks have outperformed large caps on average. Weekly macroeconomic data confirmed that the U.S. economy remains resilient. Q3 GDP growth was revised up to 4.4%, weekly jobless claims remained very low, and consumer spending stayed strong, including over the holiday season. Core PCE inflation (excluding volatile components) came in at 0.2% in October and November, supporting a “gradual disinflation without a growth shock” scenario. Markets are now pricing in only 40 basis points of Fed rate cuts for 2026. The Federal Reserve has entered its blackout period ahead of the FOMC meeting at the end of the month.
Precious metals continued to rise, with gold prices reaching new highs above $4,996 per ounce, driven by political risk, central bank purchases, and investor demand for diversification.
The technology sector was weighed down by disappointing outlooks, with declines in Netflix, Intel, and semiconductor stocks dragging on performance. The sector recovered some ground late in the period thanks to gains in AI infrastructure and data center equipment companies, but still ended the week down 0.51%.
Industrials and transportation performed well, supported by strong small-cap performance, improving growth sentiment, and the prospect of a resilient but controlled U.S. economy. Energy stocks saw more volatile trading. Oil prices briefly moved above $60, before retreating amid signs of de-escalation in Ukraine and adjustments to demand expectations. Even so, major oil companies and selected energy services stocks helped the sector post a 2.56% gain.
The financial sector showed mixed performance, ending the period down 1.16% overall. Banks and credit card companies remained under pressure amid discussions on caps on interest rates and fees, while asset managers and exchanges benefited from higher trading volumes and market activity. The healthcare sector (+1.64%) once again closed higher, driven by a rebound in biotechnology and news that Boston Scientific Corp. will acquire Penumbra.
