Trade wars, real wars and the markets

Pushkin. Donald Trump sounds increasingly serious about taking over the island of Greenland. Using economic coercion or even military force. Markets don't know how to respond. Neither do the rest of us. Today on the show. A Greenland Trade War. Or perhaps worse. This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. I am Rob Armstrong, coming to you from Unhedged World Headquarters in a freezing cold New York. I am joined down the line through

Through the miracles of technology by FT Alphaville's Toby Nangle. Hi, Toby. Hey Rob, how are you doing? I'm a little frazzled this morning, if I can be perfectly honest. I don't know what to make of this story, and we have our work cut out for us trying to make some sense of this. Absolutely. Let's just make sure our listeners are up to date.

on the events of the last couple of days. Late last week, Donald Trump threatened retaliatory tariffs against eight European countries that have sent military support to Greenland. And since then he's made increasingly belligerent comments saying that there is no turning back from the US's pursuit of the Arctic Islands. Meanwhile, markets are freaking out. The dollar has fallen significantly since Friday. European stocks have been down now for two days.

with the biggest European firms falling the most, those big companies like ASML and L VMH and SAP that have big global operations. those stocks are down sort of four to six percent. Gold is up. Treasury yields after the market opened this morning are rising significantly. Toby, what is the world responding to here? And in particular, what is Europe seeing that has

their markets in something of what looks like an uproar from where I'm sitting. Yeah. Well I mean if you have a NATO ally essentially threatening to annex The territory of a friendly nation. That's that that does spell a meaningful step back in globalisation for one, and any company that is sort to benefit and and uh make profits out of globalization, they're gonna be in for a tough time, right? Aaron Powell I mean I g I guess that's the picture here is that actually it's not about Greenland.

It's about a system that Trump and the Trump administration have always been hostile to, but until this moment, they've done nothing overtly that would break it up wholesale. Right.

there is an attack on a economic slash financial system here, not just a land grab. Well, I mean I I think that there's is an attack on as a much larger and more blatant visible attack on a rules based order than we've seen before, although it's pretty consistent with persistent attacks on the rule based order from the Trump camp.

But this this basically says, Okay, right, you know, we're not gonna we're not gonna draw a line now which might prevent us marching soldiers into a friendly territory uh friendly nation's territory and calling it our own. That's quite a big step up. I mean it's something that European leaders will absolutely uh you know, go to the wire on. It's something that has united all the opposition parties, all those Trump friendly alt right parties across Europe.

they're suddenly found themselves backed in the corner and they're having to to denounce Trump because you know you can't just say, Okay, oh yeah, sure, it's fine to go and invade a country. That's just that's just not okay. One thing that's been really interesting to me is how market observers looking at these moves in gold, the dollar, European stocks, US stocks. They look at this and some of them say the market is overreacting.

There's gonna be a a taco trade here, while others are saying the market is underreacting. The world order is changing here, and this is not the market falling. This is the market sort of frozen in the headlight. not seeing what a serious situation we're in. I I'm I I'll tell you I'm not quite sure which side

U I'm uncharacteristically frozen in the headlights myself. I'm not sure which side of that I come down on. I think that's a great characterization because you know, as as uh as as a great man once said, you know, Trump always chickens out.

And if that's the case, then you buy and you dip because it always comes good, right? If the guy does chicken out, then people who are selling, you know, Microsoft five percent down or or or treasury yields, you know, ditching those when they're at they're at ten basis points higher than they would otherwise be, they're gonna feel pretty stupid. But, um...

You know, it does feel like some of how how do you feel? What are what are you buying? Are you selling? I'm I'm pushing you here. Oh oh I I'm I'm sat firmly on the fence. Fancy. I I I I do feel though that um that with this Rubicon

sort of crossed. I mean there is this l you know, he ha he hasn't actually literally w uh marched soldiers into a a friendly nation to take it over yet. But he said he's gonna do that. And that just saying he's gonna do that is some kind of line that he has crossed afresh.

That's gonna make people feel, okay, right, you know, we're gonna stick to our base case, but we're gonna have to th consider some other scenarios and we're gonna have to maybe put a little bit of weighting on that. We're gonna have to have some contingency plan. I mean, you know, actually talking about contingency plans. I don't know if you saw the the story uh today that uh the Canadian military have been war gaming a US invasion of Canada. Good lord. I hadn't seen that.

But you've got to have some contingencies. You've got to put in new contingencies that you've never had before. So how does how does a stock with massive US investments, uh base in Europe, how does it think about organising itself? How does it make its investment decisions going forward? I mean it makes everything more complex and even if you care t no you know, if you don't care two hoots for the global rules based order

You're gonna have to be thinking about what happens when things are different than what they used to be. And that feels like the new world we're in. Let's talk about Europe.

arsenal of response in the face of what you call h uh Trump's bellicosity. Europe has got a bunch of kind of nuclear responses, as in financially nuclear responses. And it's a question of, you know, if you fire one of those off, what happens? Is that too much? What I think that Europe is trying to do is is provide a

what they see is proportional and potentially escalating series of responses. So I mean you'll know that back in twenty twenty three Europe puts together what's called this anti coercion instrument. Which basically allows them to act as a a unified block in providing kind of you know tariffs and and financial sanctions on powers that are seeking to blackmail them really. And it was put together uh in response to what was perceived to be a threat from China. Um, not at all, with the US in mind.

that's something that's being that's being talked about right now, which would provide a variety of a uh of retaliatory tariffs. And those are a language that I think Trump understands very well and they're actually can be you know calibrated pretty carefully. Um but you can then go into like much bigger things of Things like saying, you know, okay, well we're going to repeal the anti circumvention laws that protect U uh US intellectual property.

And so, you know, you can jail break all of US tech. I mean, that would be that would be that would be fairly nuclear from an economic or financial perspective, without even going to things like, oh well shut w we'll turn off Euroclear or anything like that or or impose additional capital charges for US Treasuries or I mean there's a whole host of things they can do. You're right. Rob Robin Wigglesworth and I uh wrote a wrote a piece yesterday

Which was kind of pushing back on the idea that Europe could just, you know, ditch the entirety of its of its uh US holdings. Let me give you an example of this idea. the idea about Europe ditching treasuries en masse. driving US interest rates up and, you know, twisting the President's tail that way. This is from the pages of the FT from R Rebecca Patterson of the Council on Foreign Relations. She writes.

If Europe wants to deter Washington from a Greenland takeover, it could signal it wants government-affiliated investors such as public pensions funds to review and potentially scale back U.S. Treasury's exposure. That would create expectations of weakness in the market, spurring other asset owners to also cut holdings, pushing up long-term yields, and creating a contagion across other financial markets. Well, that sounds like a plan. What what did you and Robin say about that?

So Robin Robin and I were pushing it against a much, much more straw person than that. Uh because there were initially kind of views that ah Europe owns eight trillion and we kind of looked at numbers and looked like twelve and a half trillion of uh US financial assets that it could somehow sell. The problem is, of course, that this is owned by

millions of individual private entities, some of which are based in Europe and some of which just happen to have their money in custody in Europe. And it's not owned by European sovereign states. The the measure that you you talked about just then was just talking about public pension funds. That would send a signal? I don't think it would send a huge signal. Uh d I mean that just comes from my my um my geeky fascination with um funded public pension funds in Europe.

In the US, funded public pension funds are enormous. In the UK, proportionate to the UK economy, they're pretty big. Elsewhere, not so big. I mean, so you've got a few Danish funds, you've got some Swedish funds, you've got the Norwegian sovereign fund, the big oil fund, which could do something if it wanted to, but tends to try to avoid these kind of things.

But uh the pension system on the funded side isn't so much on the public side in in uh in Europe as it is in the US. And so yeah, sure, that that would be something they could announce. It would mean coordinating with eighty eight different Local government pension scheme administering authorities. In the U UK to to talk about how that fitted. Just in the UK to say nothing of the rest of Europe.

Yeah, well there aren't that many in the rest of Europe. Right, right, right, right. And they're not that big a deal. Um but yeah, I mean it would certainly send a message, you could say that, but uh whether you can actually execute it, I don't know. I mean what we're talking about here is whether Europe can move the US ten year treasury. And what uh you seem to be saying, Toby, is maybe not.

I thi I think that it's very hard to mobilize everyone's ac independent private actions together. If you wanted to really hurt the US uh tenure treasury, you could do something like, you know, have the E C B apply an additional risk rating for any banks that use them in transactions, you know, as as as collateral. Uh and and that would certainly

hurt the treasury market, it could also really throw a spanner in the um in the European uh financial uh institutions functioning as well. That was kind of my next question for you actually, and you touch on this briefly in your Alpha Bill piece. How much are we in a mutually assured destruction kind of situation?

Europe decides to pivot away from US financial assets, you know, overlooking all the coordination problems you just referred to. What kind of damage does that do to Europe and what form does that take? This is the issue which European policymakers have b and also private sector actors have been increasingly focused on in terms of the the integration over the past few years just in terms of contingency planning or resilience planning.

Um, and I I I I bumped into this when I was having actually a look at the development of a potential central bank digital currency in the in in the European Union. And I was really surprised to see the level of concern that I encountered around the duopoly of payments in Europe from MasterCard and Visa. It wasn't about, you know, are they extracting too much profits? Because that could be regulated, but it was rather, do we really want to have our payment rails?

in the hands of a couple of companies controlled by a foreign power who may not always be friendly. And that that really struck me as very, very strange. That was about a year ago. I'm and those conversations have always been going on for a couple of years before that. No matter what I mean, if everything just reverses back to where it was a few weeks ago.

I can still see that the trajectory for integration uh will be different from now just because of what's happened. You can't kind of undo it. If I am a big State actor, non-state actor, pension fund, fund manager, sovereign wealth fund, whatever. And I decide I want to own less treasuries. What do I own instead? That's what I'm wondering. I'm looking here at the yields on sovereign bonds. The United States 10 year gives you four point three percent.

The United Kingdom gives you a little bit mo and a bit more than that, four point four percent. The rest of Europe is notably lower. Japan is two point three. Point number one is where else do you get the kind of yield America affords you right now? And the second point is, is there enough of this other stuff? In other words, the the great thing about treasuries is the deepest market in the world. And I'm wondering, is there anywhere to move your fixed income allocation to?

I'm gonna have to start asking you questions in a minute because Yeah, you're asking me all the hard questions, Rob. I know I'm just airing my thoughts. I'm not expecting you to be some kind of genius, Toby. I'm just using you to vent my anxieties here. So y so basically you're my therapist, is what I'm saying. Okay. Is it's all about the dollar, right? So i the the US uh treasury market is the biggest in the world with the dollar at this at the current rate, you know?

Yeah. If you reduce the value of the dollar, then it shrinks the US Treasury market compared to other markets around the world. It's kinda like, you know, when people talk about gold, they think there just isn't enough gold to make it a viable, you know, uh store a value or anything because it can all fit in some, you know, X by X cube, thirty meters by thirty meters or something else. And, you know, the answer to that is, well, you know, I may not believe in gold or anything, but

at the right price, you know, you could split the world into the you know, if you at at like a million dollars a an ounce. Yeah, yeah, yeah. That's that's easy, right? Yeah. So so I mean with the with the treasury market, it's very large, it's very liquid. It's got very Type bit offers, it's got extremely high functioning and sophisticated plumbing systems around it and and that kind of sophistication and and uh liquidity is is astonishing. And I don't think you see a replicated

elsewhere, but in terms of size, the size of it compared to other markets is really a function of the value of the dollar. And so if people start to like decide, okay, I tell you what, we're gonna help Trump out. in his quest for a a zero like current account deficit or zero trade deficit, and that occurs through a contraction of the US economy. and a collapse in the in the value of the dollar, then a lot of these issues that you know about comparable assets, they fall away quite quickly.

But I mean I I'm waiting for you then Rob. Wait, wait, wait, no, no. I'm gonna I'm gonna I'm gonna make your point for you, Rob. Is that actually, yeah, the US still has some of the best companies in the world that cannot be found anywhere else. And so when you're looking for stocks,

I think it's it's less of a question of treasury. I think it's more a question of stocks. Like if you wanna own an NVIDIA, if you wanna own an Apple or a Microsoft, there's only one of those guys and they're all based in the US. No, it it's really, really hard to replicate what you can do in the US. It's it's kinda the US stock market is the global market, right? So basically it has the preponderance of the world spanning companies.

even those who may only be half in the United States operationally, they're a hundred percent based in the US officially. That's a huge problem. Here's a question for you. Is all this anxiety around the dollar.

actually fine with the Trump administration. At the outset, there was a lot of the dollar is overvalued talk for And if this kind of insane saber rattling around Greenland makes the dollar weaker As long as Treasuries, the 10-year Treasury doesn't go above 5%, they're perfectly happy with that. What what's wrong with that idea? Or I could I could almost frame it as a question. I could say can you get the dollar weaker without getting the ten year yield higher?

Can the Trump administration thread that needle? I mean, there's nothing to stop that happening. Uh I I think you can quite easily have low yields and a weaker currency. But I think that, you know, I mean Trump says so many things and you can choose to focus on one thing or another thing. I mean back last July no, wait, hold on. Um it was the July of the year before we said.

if we ever lose the status of the dollar, that's the equivalent of losing a war. That would be unbelievable. So if he thinks that losing dollars dominant world status is like losing a war, or in his words, a major world war, and he doesn't want that to happen, then I don't know how you can you can keep yields low, you can keep the currencies strong.

And you can also run a massive current account deficit without essentially kind of like, you know, enslaving the world. But I'll leave I'll leave that with you. Well, while it is probably impossible to predict what is going to happen in the coming days and weeks, we'll be here talking to you about it. And for now, we'll be back in With long and short.

Listeners, welcome back. This is Long and Short. That portion of the show where we go long things we like. Or short things we don't like. Toby, do you have a long or a short for us? I have a long, Rob. Tell me. Okay. My long is live T V. I never watch live T V anymore because I you know, I watch my Netflix or my you know, my whatever.

Yes. And uh this is a very quick sodic long. I can't believe you're doing this. So what is it? Well, I mean in the UK uh we've got this series called The Traitors and I've been watching the traitors and it's been a lot of fun gathering around the T V with my kids. So you're talking about not literally live, you're talking about like broadcast TV, T V that comes on at a particular time.

Scheduled T V, yeah, yeah. No, uh I go around declaring that to be dead all the time, but y you're taking you're taking the other side of the trade. In the Nangle household? Absolutely. I am going to go long ASML, a stock uh often mentioned in the context of what we discussed today. It is the indispensable manufacturer of chip making equipment. It has been down. It's been up a lot recently, but down a bit in the last couple of days.

I think however this situation over Greenland ends, ASML comes out the winner because it can simply do stuff the world needs better than anyone else. So if that stock keeps dipping, I think It's a great long. Of course, this is not investing advice, as anyone who has followed my results in the FT stock making contest will know. Talk to your financial advisor, not some journalist with a podcast. Unhenged is produced by Jake Harper and edited by

Earthstep. Our executive producer is Jacob Goldstein. We had additional help from Topher Forge. Cheryl Rumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the unedged newsletter for free. A 30-day free trial is available to everyone else. Just go to FT Premium. I'm Rob Armstrong. Thank you for listening.