World markets face fresh jolt as Trump vows tariffs on Europe over Greenland

By Karin Strohecker and Dhara Ranasinghe

LONDON, Jan 18 (Reuters) - Global markets face a fresh bout of volatility this week after President Donald Trump vowed to slap tariffs on eight European nations until the U.S. is allowed to buy Greenland.

Trump said he would impose an additional 10% import tariffs from February 1 on goods from Denmark, Norway, Sweden, France, Germany, the Netherlands, Finland and Britain, which will rise to 25% on June 1 if no deal is reached.

The eight European states issued a joint statement backing Greenland on Sunday, while Ireland's prime minister said the European Union will retaliate if U.S. tariff threats against Europe materialise.

"Hopes that the tariff situation has calmed down for this year have been dashed for now - and we find ourselves in the same situation as last spring," said Berenberg chief economist Holger Schmieding.

Sweeping "Liberation Day" tariffs in April 2025 sent shockwaves through markets. Investors then largely looked past Trump trade threats in the second half of the year, viewing them as noise and responding with relief as Trump made deals with Britain, the EU and others.

While that lull might be over, market moves on Monday could be dampened by the experience that investor sentiment had been more resilient and global economic growth stayed on track.

Nonetheless, Schmieding expected the euro could come under some pressure when Asian trade begins. The euro ended Friday at around $1.16 EUR=EBS against the dollar, having hit its lowest levels since late November.

Implications for the dollar were less clear. It remains a safe haven, but could also feel the impact of Washington being at the centre of geopolitical ruptures, as it did last April.

"For European markets it will be a small setback, but not something comparable to the Liberation Day reaction," Schmieding said.

European stocks are trading near record highs, with Germany's DAX .GDAXI and London's FTSE index .FTSE up more than 3% this month, outperforming the S&P 500 .SPX, which is up 1.3%.

European defence shares are likely to benefit from geopolitical tensions. Defence stocks .SXPARO have jumped almost 15% this month, as the U.S. seizure of Venezuela's Nicolas Maduro fuelled concerns about Greenland.

Denmark's closely managed crown will also likely be in focus. It has weakened, but rate differentials are a major factor and it remains close to the central rate at which it is pegged to the euro EURDKK= and is not far from six-year lows.

"The U.S.-EU trade war is back on," said Tina Fordham, geopolitical strategist and founder of Fordham Global Foresight.

Trump's latest move came as top officials from the EU and South American bloc Mercosur signed a free trade agreement.

'UNTHINKABLE SORTS OF DEVELOPMENTS'

The dispute over Greenland is just one hot spot.

Trump has also weighed intervening in unrest in Iran, while a threat to indict Federal Reserve Chair Jerome Powell has reignited concerns about its independence.

Against this backdrop, safe-haven gold XAU= remains near record highs.

"Markets at this point are expected to reopen this week in 'risk-off' mode," said IG market analyst Tony Sycamore.

"This latest flashpoint has heightened concerns over a potential unravelling of NATO alliances and the disruption of last year’s trade agreements with several European nations, driving risk-off sentiment in stocks and boosting safe-haven demand for gold and silver."

The World Economic Forum's annual risk perception survey, released before its annual meeting in Davos, which will be attended by Trump, identified economic confrontation between nations as the number one concern replacing armed conflict.

While investors have grown increasingly wary of geopolitical risk, they have also become used to it to some extent.

"Investor sentiment has proven quite resilient in the face of the sort of continuing unthinkable sorts of developments, which probably reflects a combination of like faith that Trump just won't be able to do all of the things that he talks about mixed with a sense that none of this kind of moves the needle on asset prices," said Fordham.