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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
One of the reasons this moment in history is such a headfake for investors is that it demands they do opposite things at the same time. They need to shut out the noise but also listen to it carefully, ignore it but also take some pretty radical action.
The case for shoving cotton wool in your ears and refusing to watch The Donald Trump Show, now in its spectacular second series with zany new scriptwriters, is simple. It’s exhausting, for one thing. But for money managers, it’s also largely pointless.
In a week that has seen potential US military action against humble Greenland first floated, then seemingly withdrawn, the US stock market has done, well, not a lot really. It fell at the start of the week, fairly hard in fact — the S&P 500 index shed 2 per cent or so on Tuesday (Monday was a holiday in the US), marking the worst day since October. By the end of the week, however, we were back where we started, in the markets at least. So on a short-term basis, the correct course of action was: do nothing.
The problem here is that while stocks are back to square one, the real world is not, hence Canadian Prime Minister Mark Carney’s declaration this week of a “rupture” in the world order.
For investors, especially those outside the US, plodding on as if nothing has changed would be a huge mistake. Without any clear insight into the strategic mind of the US president, we still cannot be sure he has put his designs on sovereignty over Greenland to bed. We do not know whether his repeated references to Iceland in his speech in Davos this week were a wild slip of the tongue or a hint of something deeper. Heaven alone knows what he will turn to next. But market participants latched on to Trump’s line that he “won’t use force” in Greenland, and ran with it. That was the moment that stopped the discomfort in the stock market. At this rate, a new record high in stocks must be just around the corner.
The episode underlines once again that markets — stock markets in particular — are simply not a useful way to keep the president in check in the manner that lots of people in financial circles, myself included, had anticipated. In part that is because the Taco trade has eaten itself.
The concept that Trump Always Chickens Out, as coined by my colleague Rob Armstrong, has been pretty reliable for the past nine months or so, and stems from the president’s climbdown on trade tariffs last April — a U-turn that sent deeply distressed stock markets soaring.
Now, though, investors are so accustomed to the backtracks, that markets respond pretty mildly to each new outrage. A 2 per cent drop in stocks and a modest pullback in benchmark government bond prices are just not enough on their own to scare the president into a change of heart. It worked after the infamous Liberation Day tariffs announcement, but that generated a 15 per cent hammering in the US stock market in just a few days. This week’s wobble is just too puny.
The game theorist in each of us can see how dangerous this is. It pushes the president’s impulses further each time and takes us closer to a serious geopolitical or economic accident.
The reality, though, is that the US administration would find another shakeout of the type we saw last April very tough to stomach. Upbeat stock markets are a crucial ingredient in keeping consumer confidence among high-income Americans nice and warm. Strong, stable bond markets are essential for keeping a lid on borrowing costs, hence Treasury secretary Scott Bessent’s fixation on keeping 10-year US government bond yields at around 4 per cent. All of that, as Emmanuel Cau at Barclays suggested, leaves the president with limited wiggle room.
“If anything, this week served as a reminder that the Trump administration remains highly sensitive to financial market reaction and cognisant of the pain threshold for equity investors,” Cau and colleagues wrote in a note to clients. The answer, then, is to “keep calm, hedge, and carry on”.
If you zoom out from the dazzling chaos of the past few days and focus on the big picture, it is clear that both stocks and bonds in the US come with health warnings that simply did not apply just over a year ago and that still do not apply across the rest of the developed world.
Another drop in the dollar, as we saw in 2025, would be seriously bad news for non-US investors with unhedged exposure to US markets, and it is notable that the dollar has not bounced back this week in the same way as stocks.
Some investors tell me they are war-gaming pretty extreme scenarios from here, including even the remote but plausible chance that Trump might one day threaten not to pay back government debt to investors or countries he does not like.
Even if we do not get that far, the presidential swipes at credit card fees and corporate dividend payments, and his pressure on US oil companies to drill, baby, drill in Venezuela, are much more reminiscent of the awkward state interference investors loathe in China than the free hand they are accustomed to in US markets. The Tacos on the menu are getting awfully stale.