Markets Rebound as Greenland Tariff Threats Fade

January 26, 2026

Before we delve into the markets and the economy, we note with sadness and concern the conflicts and loss of life in Minnesota.  While an analysis of the causes and outcomes is beyond the scope of this paper, there is nothing positive to be derived from the continued conflict.

Financial Markets

U.S. equities started the holiday-shortened week on the defensive. After markets reopened on Tuesday following the long weekend, risk appetite deteriorated quickly as investors reacted to renewed trade tension tied to Greenland. Over the weekend, President Trump announced a 10% tariff on imports from eight European countries—Denmark, Norway, Sweden, France, Germany, the United Kingdom, the Netherlands, and Finland—scheduled to begin February 1.

As the week progressed, the tone improved as tariff threats were walked back, helping markets retrace a meaningful portion of the early-week decline.

Sector performance was unusually bifurcated. Energy led decisively, supported by two reinforcing dynamics: (1) continued investor focus on power and infrastructure constraints associated with AI expansion and (2) a significant winter storm that lifted demand expectations for heating and electricity generation—recent data and commentary point to sharply higher natural-gas pricing amid the cold-weather demand spike. In contrast, rate-sensitive and economically sensitive groups lagged, with financials and real estate among the weakest performers.

In fixed income, Treasuries initially sold off on the tariff headlines, but the move proved short-lived. The 10-year yield ended the week at roughly 4.23%, essentially unchanged, after briefly moving higher midweek. This “up-then-back” pattern matched the week’s broader theme: policy-driven volatility in the front-end narrative, but limited follow-through in longer-term pricing of growth and inflation.

Trade rhetoric—particularly when it implicates major allies—continues to be the primary catalyst for short, sharp risk-off episodes. As we discussed last week, markets have remained highly sensitive to Greenland-linked tariff escalation risk, but have also demonstrated an ability to recover when de-escalation signals emerge.

Economics

The most notable macro signal this week was not a single data release—it was the bond market’s continued composure despite an unusually crowded set of political and policy shocks. With the 10-year Treasury still near 4.23%, there has been little evidence of the sustained “bond vigilante” repricing many observers would expect in a period marked by heightened uncertainty.

In our view, two fundamentals help explain this stability:

First, inflation expectations remain anchored. Market-based measures continue to imply that inflation is manageable, and leading price indicators have not suggested an imminent reacceleration. Shelter remains central: official rent inflation typically lags private-market measures, and forward-looking rent indicators still point to ongoing deceleration into 2026.

Second, the economy still lacks the classic signals of an imminent downturn. Growth has cooled but remains resilient enough to support earnings and investment, while labor-market indicators continue to point to a “low-hire, low-fire” equilibrium. Initial jobless claims remained historically low at 200,000—consistent with limited near-term layoff pressure.

Taken together, these dynamics help explain why yields have been somewhat capped even as markets digest an expanding list of headline risks (trade disputes, fiscal brinkmanship, regulatory proposals, and questions around institutional independence). Put differently, volatility is being generated by policy uncertainty, but the data and pricing that matter most for long-term inflation credibility have not yet broken.

Conclusion

We remain in an unusually volatile domestic and international geopolitical environment—one that markets have largely discounted unless and until it presents clear, persistent economic consequences. The past week offered a clean example: tariff escalation risk drove a sharp early selloff, but a partial reversal in rhetoric allowed risk assets to stabilize quickly.

Looking ahead, investors should expect continued episodic volatility. With midterm-election incentives increasingly shaping the policy backdrop, headline risk is likely to remain elevated, and markets may continue to swing between brief risk-off episodes and rapid recoveries. In this setting, disciplined diversification—and a willingness to look through short-term noise when fundamentals remain intact—remains the most reliable approach.

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