US equities tumbled and Treasury yields surged on Tuesday after President Donald Trump threatened to place tariffs on eight European allies who oppose his plan to force a sale of Greenland.
The Dow Jones Industrial Average closed 870 points – or 1.76 per cent – lower. The S&P 500 and Nasdaq closed 2.06 and 2.39 per cent lower, respectively, while the small-cap Russell 2000 also ended the day in the red.
The VIX index – Wall Street's so-called fear gauge – rose 10 per cent to climb above the 20 threshold, indicating a sense of high market volatility.
“Meetings in Davos between Trump and other leaders may add volatility, especially if his plans for a 'Board of Peace' for Gaza falter and provoke renewed threats. Traders are also watching for developments on Iran,” Karl Schamotta, chief market strategist at Corpay, wrote to clients.
European leaders have baulked at Mr Trump's tariff threats. French President Emmanuel Macron, whose country was threatened with an extra 200 per cent tariff on wines and champagne if he does not accept Mr Trump's invitation to join the Board of Peace for Gaza, called the threat “unacceptable”.
Mr Trump was expected to address world leaders and senior executives at the World Economic Forum on Wednesday.
Threats of a revived trade war also sent treasuries surging, with the benchmark 10-year Treasury yield 6.4 basis points higher at 4.295 per cent. The yield on the 30-year Treasury was up 8 basis points at 4.92 per cent.
Meanwhile, gold passed $4,700 an ounce while silver passed $95 an ounce for the first time, before pulling back slightly to $94.14. The US dollar index fell 0.80 per cent to 98.60.
“Bottom line: As 'Liberation Day 2.0' unfolds, waning confidence in American economic leadership is overshadowing fundamentals in currency markets,” Mr Schamotta wrote.
Traders on Tuesday, meanwhile, did not receive any clues on the legality of Mr Trump's sweeping use of emergency tariffs, with no decision announced by the Supreme Court. The court is due to hold arguments on whether Mr Trump has the legal authority to fire Federal Reserve governor Lisa Cook, in another episode that will be closely monitored by markets.
