In response to US President Trump's threat to use tariffs as leverage to force the purchase of Greenland, global markets have shown risk-off sentiment but have reacted with relative restraint. Analysis suggests this is merely Trump's habitual "maximum pressure" negotiation tactic, and ultimately, some form of compromise will be reached between the parties.

Over the weekend, Trump threatened to impose tariffs on several European countries, including the UK, France, and Germany, to pressure Denmark into handing over Greenland. With US stock markets closed overnight, S&P 500 index futures fell slightly over 1%, European stocks saw similar declines, and gold rose by less than 2%.

According to The Wall Street Journal, these fluctuations are far smaller than the market reaction expected for a catastrophic event—since 1964, the S&P 500 has averaged 21 similar declines per year, and gold futures have averaged 15 similar gains annually since 1979, indicating a lack of panic in the market.

Analysis suggests this geopolitical stalemate may follow Trump's frequently used script of "escalating to de-escalate." Rich Privorotsky, head of Goldman Sachs' Delta-One desk, pointed out that his base case is that Trump will reach a compromise at the last moment. He noted that this stance is unpopular domestically, with polls showing only 17% of Americans support the effort to acquire Greenland, and an overwhelming majority of both Democratic and Republican voters oppose using force to annex the island.

The Four Logics Behind the Market Reaction According to analysis by The Wall Street Journal, investors' muted reaction to the Greenland incident can be attributed to four factors. First, the market may have become immune to Trump's rhetoric. The market reaction was stronger when Trump announced "reciprocal" tariffs in April last year, but ultimately the economy performed well, corporate investment rose, and inflation, while increasing slightly, ended the year lower than when Trump took office.

Second, this could be a revival of the "TACO trade"—betting that Trump always backs down at the final moment. While some of his policies have been implemented, it is difficult to judge when he is serious and when he will concede. Even if he is serious, Congress does not support this idea, and the Supreme Court may soon rule his tariff methods illegal.

Third, investors may see potential gains. A frightened Europe would significantly increase military spending; European defense stocks surged on Monday, while domestic European utility stocks benefited from safe-haven fund inflows. If European governments increase spending, it benefits shareholders.

Fourth, a new world order is difficult to imagine, and investors may be choosing to ignore this prospect because it is hard to price. Similar situations have occurred historically—after the assassination of Archduke Franz Ferdinand of Austria in 1914, investors ignored it for nearly a month until war arrived and panic ensued. After the new Russian government announced a debt default in 1918, Russian bond prices did not fall but instead rose for several months.

Betting on "Last-Minute Compromise" Goldman Sachs analysis believes the market's lack of panic is largely because investors see Trump's threats more as a negotiating posture.

Rich Privorotsky, head of Goldman Sachs' Delta-One desk, stated that the current situation aligns with a known negotiation strategy: if the US goal is more about mineral rights, an expanded military presence, or a unified Arctic alliance, then this maximum pressure is intended to secure the most favorable terms for the US at the negotiating table.

Furthermore, US domestic political factors also constrain aggressive action. Privorotsky pointed out that this being a midterm election year makes taking extremely unpopular policies highly risky. A Reuters/Ipsos poll shows only 17% of Americans support Trump's acquisition of Greenland, with an overwhelming majority of both Democrats and Republicans opposing the use of force to annex the island.

The timing of this event is also intriguing, coinciding with the week of the Davos Forum. Privorotsky believes this is no coincidence, further suggesting this might be a carefully orchestrated game.

Meanwhile, the US Congress does not support this idea, and the Supreme Court may soon rule on the legality of Trump's tariff methods. These factors lead investors to tend to view this tariff threat as a short-term disruption, or even to bet that Trump will "chicken out" at the last moment as he has done in the past.