Greenland sparks fresh economic and market worries

Global equity markets sold off on Tuesday, as the stand-off between the US and the EU over Greenland intensifies, with both sides threatening a surge in tariffs. On Tuesday, global equities lost 1.5%, US equities were down 2%, and the Dollar slid 0.8% against a basket of currencies. Bonds were also slightly negative, suggesting wider risk aversion. Reaction for European and UK stocks was more muted, but still negative. Gold rose 3.5% since Monday.

Why tariffs again? Hadn’t the US signed deals with allies? For certain types of leadership, constant forward motion, directional or not, is necessary. Thus, if 2025 and the beginning of 2026 should teach us anything, it is that political and geopolitical volatility are here to stay. It is the job of asset managers to properly price idiosyncratic (non-systematic) risk, even systematic risk when they can confidently predict it (for the few Michael Burrys out there). It is not to predict political and geopolitical outcomes.

With all that’s happening every week, it’s a good exercise to prioritise the most important news for businesses and investors.

The third most important news of the week is that Kevin Hasset, the previous favourite to run for Fed Chair has been told by the President that he would prefer him to stay where he is. Kevin Warsh, a former Fed member but also a White House favourite, is now leading the race, followed by Christopher Waller (already on the board) and Rick Rieder (BlackRock’s Chief Investment Officer). Why is it less important? Because markets never really warmed up to Hasset. The important issue is not the “who” is selected for Fed Chair, but the “what then”? The larger question for whoever is chosen (and who will have an assured seat beyond the President’s tenure) is what stance they will adopt thereafter. Will markets get an Arthur Burns-type loyalist, who could undermine the Fed’s efficacy and independence, or a Fed-institutionalised Thomas Beckett-type?

The second most important news was the threat of fresh tariffs, which is of particular interest to markets, with the US President threatening a fresh 10%-25% tariff surcharge to countries that oppose his proposed takeover of Greenland, and the recommended c.100bn Euro reciprocal tariffs from the EU (and maybe even the UK). However, many, including the Forvis Mazars Economics Hub, predicted that the initial deals were tentative at best. It wasn’t difficult to forecast that the threat of tariffs would re-emerge when interests clashed, or that they would do so again in the future. Having said that, we would not be too quick to price in fresh tariffs, however, as the Supreme Court’s IEEPA tariffs ruling is still pending.

Nevertheless, despite the initial negative market reaction (lower equities, higher gold) following the tariffs, we think that the important news to watch is from the tech sector, where the industry is racing towards more development of Agentic AI, i,e, transitioning from Chatbots to AI actually doing tasks with simple prompts and becoming an office all-rounder. Anthropic, a key AI provider, caught the eye of investors as it came up with a new tool called “Cowork”. While still in the testing phase and rolled out in Mac PCs, the tool allows non-coders to create agents with zero knowledge of coding. For example, one simply has to prompt “arrange my desktop”, and they have it. The tool was astonishingly created in 10 days. One of our basic theses is wider AI adoption in 2026. Developments are moving fast towards that direction, and we feel confident that we will see an increase in productivity and improved AI monetisation.

Is a new office tool more important to investors than the deteriorating global economic backdrop? Well, there are four distinct major markets right now.

1. The equity market, whose present valuation relies on evidence of wider AI adoption and a significant earnings bump in 2026. To them, Agentic AI development is important.
2. The short bond market, which remains relatively calm, assuming the Fed will deliver more rate cuts than it presently forecasts.
3. The long bond market, which increasingly worries about the effects of more complicated global supply chains, trade wars and lingering inflation.
4. The non-financial asset market (from gold to real estate), with varying degrees successfully drawing conservative investors who fear the long bond market.

What it all means for consumers and businesses

The University of Michigan Consumer Index, one of the more respectable independent surveys in the US, suggests that consumer sentiment varies according to political affiliation. Those who agree with the government feel happy to spend, those who don’t, would tend to save more. Similar tendencies can be observed in Europe. There are, generally, three types of consumers: politically partisan, non-partisan and affluent. Partisan consumers, who affiliate with the government, will continue to spend. So will affluent consumers, who account for the largest part of consumption. Despite increasing worries about politics, we don’t see a reason for consumption to drop spectacularly in the US, unless food and energy inflation pick up significantly. In Europe, which is consistently targeted in America’s trade war, and despite lower inflation, we could see more reticence in consumption, as the economy remains broadly weak.

What it means for investors

It may sound like a paradox to say that in periods of higher uncertainty, equities would make a more likely destination than bonds. However, stripping all the geopolitics, the one macroeconomic variable that matters most right now for investors is inflation. When inflation is present, equities tend to outperform fixed income. If America’s continued trade wars prove inflationary (which they may very well do so in 2026 as companies pass more costs onto consumers), then fixed income will likely underperform versus its long-term average returns. Equities, on the other hand, are riding the tailwinds of the AI revolution, inflation (and flight from bonds), and the possible further devaluation of the US Dollar.