Asian Stocks Rally as Tariff Threat on Europe Recedes Following NATO Greenland Agreement

The January 21, 2026 announcement of a NATO framework agreement on Greenland and the subsequent cancellation of European tariffs triggered broad-based equity rallies across Asian, European, and U.S. markets. President Trump made the announcement at the World Economic Forum in Davos, Switzerland, stating he had reached a “framework of a future deal” regarding Greenland and the Arctic Region with NATO Secretary General Mark Rutte [1][2]. This development resulted in the immediate removal of tariff threats that had been escalating earlier in the week, when Trump had threatened tariffs on European allies over their resistance to his Greenland acquisition plan.

Asian markets demonstrated the strongest regional response to the tariff relief announcement. The South Korean Kospi index recorded the most significant gain among tracked Asian indices, rising 2.10% to close at 4,909.93 [0]. Japanese markets, which had been recovering from earlier weekly declines, added 1.05% with the Nikkei 225 closing at 52,774.64 [0]. Chinese markets exhibited more modest gains of 0.33%, with the SSE Composite finishing at 4,116.94, reflecting the event’s indirect impact on China-focused investments [0]. The varied regional response suggests differing sensitivities to transatlantic trade policy developments, with Korea and Japan showing particular responsiveness to U.S. trade stance changes.

The U.S. market experienced a sharp reversal following Trump’s announcement, recovering from what had been the worst single-day decline since October 2025. The Dow Jones Industrial gained 1.09% to close at 49,077.24, the S&P 500 rose 0.95% to 6,875.61, and the NASDAQ Composite added 0.90% to 23,224.82 [0]. All major indices had shown intraday highs significantly above their closes—Dow +1.54%, S&P 500 +1.67%, NASDAQ +2.00%—indicating substantial morning momentum that partially faded into the close [0]. The Russell 2000 led with a 1.35% gain, suggesting small-cap stocks benefited particularly from the risk-on sentiment.

U.S. sector performance on January 21 revealed broad-based strength consistent with risk-on market conditions following tariff relief. Consumer Defensive stocks led with a 1.91% gain, followed by Healthcare at 1.84% and Consumer Cyclical at 1.79% [0]. Communication Services added 1.46%, while Basic Materials and Energy both posted gains above 1% [0]. Technology, which might be expected to lead in risk-on environments, lagged with a 0.71% increase, and Real Estate rose a modest 0.51% [0]. Utilities was the only declining sector at -0.24%, a typical pattern when investors rotate out of defensive havens [0].

The rotation into both defensive sectors (Consumer Defensive, Healthcare) and cyclical Consumer Cyclical indicates investor sentiment was broadly positive but somewhat balanced rather than euphoric. This pattern suggests market participants viewed the tariff cancellation as removing a specific tail risk rather than fundamentally changing the broader economic outlook. The participation of multiple sectors across the defensive-cyclical spectrum confirms genuine risk appetite returning to the market rather than sector-specific speculation.

Bond market dynamics provided important context for the equity rally. The previous day’s “Sell America” trade—which had seen the dollar suffer its worst day since August and Treasury yields rise to September highs—fully reversed following the tariff announcement [3]. Trading volumes remained elevated across U.S. markets, with NASDAQ recording 7.51 billion shares traded and S&P 500 showing 5.84 billion shares, confirming genuine investor participation rather than thin-liquidity-driven price movements [0].

Analysts immediately drew parallels to the “Liberation Day” tariff episode from April 2025, which had resulted in more severe market declines [3]. John Higgins, Chief Markets Economist at Capital Economics, noted that market pressure appeared to influence policy decisions, observing that significant sell-offs would likely prompt reconsideration of aggressive policy proposals [3]. This pattern led some strategists to label the phenomenon “TACO” (Trump Always Chickens Out), suggesting markets have learned to expect policy reversals under financial pressure [3].

The episode reinforced market expectations of policy flexibility under financial market stress. Ethan Harris, Former Head of Global Economics at Bank of America, summarized the prevailing market sentiment: “The markets have learned that these corrections don’t last, therefore, no reason to panic” [3]. However, Karl Schamotta, Chief Market Strategist at Corpay, cautioned that the episode “has nonetheless reminded investors of the erratic nature of the current US policy regime, meaning that slow-motion diversification flows could continue for the (un)foreseeable future” [3].

The stakes involved in the tariff threat were substantial from a systemic risk perspective. European countries hold approximately $8 trillion in U.S. stocks and bonds, meaning prolonged selling pressure could have significantly raised U.S. borrowing costs [3]. The tariff cancellation removed this systemic risk factor, contributing to the breadth of the positive market response across asset classes and geographic regions.

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: The rapid swing from the worst single-day decline since October to a strong recovery illustrates elevated market volatility tied directly to geopolitical policy announcements. The 871-point drop in the Dow on January 20 [3] was entirely reversed within one trading session, demonstrating how quickly sentiment can shift based on presidential communications. This dynamic creates challenges for risk management and portfolio positioning, as binary policy outcomes can produce extreme short-term market movements.

: The Asian market response revealed important variations in regional sensitivity to transatlantic trade developments. Korea’s 2.10% gain reflected particularly high sensitivity to trade policy developments, potentially due to Korea’s export-dependent economy and historical vulnerability to U.S. trade stance changes [0]. Japan’s 1.05% recovery indicated concerns about cross-Pacific trade relationships, while China’s modest 0.33% gain suggested the event had limited direct exposure for China-focused investments [0]. These differential responses provide insight into how various Asian economies might react to future trade policy developments.

: The NATO framework agreement on Greenland represents a significant geopolitical development that extends beyond immediate trade concerns. While specific terms of the agreement have not been publicly disclosed [2][4], the development involves complex issues of sovereignty, resource rights in the Arctic region, and alliance dynamics that could have long-term implications for defense spending, regional security arrangements, and natural resource development. The complexity of these issues suggests potential for future market-relevant developments as negotiations progress.

: The emergence of the “TACO” market narrative creates potential moral hazard in positioning. If investors consistently expect policy reversals under market pressure, they may take on excessive risk during sell-offs expecting quick reversals. However, this dynamic could be punished if a future tariff threat is not withdrawn or if escalation occurs despite market stress. Arun Sai of Pictet Asset Management noted that while this episode was less severe than the April 2025 “Liberation Day” sell-off, similar events could recur with varying intensity [3].

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: Despite the positive market reaction, fundamental policy uncertainty remains elevated. The episode has reinforced that policy announcements can shift rapidly based on market conditions, but this flexibility itself creates uncertainty about future policy directions. Investors should remain aware that future policy reversals or escalations could trigger similar volatility patterns, particularly in sectors sensitive to trade policy. The “erratic nature” of the current U.S. policy regime, as characterized by market strategists [3], suggests diversification strategies may continue to evolve.

: The pattern of tariff threats followed by reversals may encourage risk-taking during future sell-offs. However, this dynamic carries execution risk if a future tariff threat is not withdrawn or if escalation occurs despite market pressure. The “TACO” narrative could become less reliable if market pressure fails to produce policy reversals in future instances, potentially leading to sharper declines than markets have come to expect.

: The Greenland situation involves complex sovereignty, resource rights, and alliance dynamics that could resurface as sources of market volatility. Denmark’s position on Greenland sovereignty remains unaddressed in current reports, and the Arctic framework may face implementation challenges [1][2]. Future disagreements over framework details could reignite tariff threats or create new sources of tension.

: The rapid sentiment shift has created short-term trading opportunities in previously pressured sectors. Companies with significant European exposure that were punished during the tariff uncertainty period may experience valuation recovery. However, this opportunity is time-sensitive and dependent on sustained policy clarity, which remains uncertain given the pattern of rapid policy changes.

: Treasury yields and dollar movements serve as potential constraints on aggressive policy implementation. The market’s ability to influence policy through financial conditions suggests bond market behavior warrants continued monitoring as a potential early warning system for policy adjustments.

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The January 21, 2026 announcement of a NATO framework agreement on Greenland led to the cancellation of planned European tariffs and triggered broad-based equity rallies across global markets. Asian markets showed strong gains, with South Korean and Japanese indices leading the regional advance. U.S. markets recovered from their worst single-day decline since October, with all major indices posting gains of approximately 1%. Sector performance was broadly positive, with consumer defensive, healthcare, and cyclical sectors all participating in the rally.

Key market indicators showed genuine investor participation through elevated trading volumes, and the previous day’s bond market stress fully reversed following the announcement. Analysts noted parallels to the April 2025 “Liberation Day” tariff episode, with market pressure appearing to influence policy reversals—a pattern some have termed “TACO” (Trump Always Chickens Out).

Several important details remain unclear, including the specific terms of the NATO Arctic framework, official reactions from Denmark and other NATO allies, implementation timelines, and whether the policy flexibility demonstrated will extend to other trade policy areas. The complex geopolitical and economic dynamics underlying the Greenland situation suggest potential for future market-relevant developments as negotiations progress.

European holdings in U.S. assets—approximately $8 trillion in stocks and bonds—provided context for the systemic risk implications of the tariff threat, which has now been removed. The episode underscores the sensitivity of current market conditions to geopolitical policy announcements and the potential for rapid sentiment shifts based on presidential communications.