Trump Tariff Cancellation Triggers Global Market Rally

On January 21, 2026, President Donald Trump announced the cancellation of planned tariffs on eight European nations following negotiations with NATO Secretary General Mark Rutte at the Davos World Economic Forum. The tariffs, originally set to begin February 1, 2026 at 10% and rise to 25% in June, were intended to pressure European cooperation on U.S. control over Greenland [1][6]. The decision followed the establishment of a “framework of a future deal” on Arctic security involving potential expanded U.S. military presence on Greenland. Global markets responded positively, with major indices rallying 0.9-1.4% across both U.S. and European exchanges, though significant geopolitical and diplomatic risks remain unresolved [3][4].

The tariff cancellation triggered a broad-based global equity rally that reversed the prior day’s market decline. U.S. indices demonstrated strong gains across all major benchmarks, with the Dow Jones Industrial Average leading at +1.09%, followed by the Russell 2000 small-cap index at +1.35%, reflecting investor relief from potential trade escalation risks [3][6]. The S&P 500 gained 0.95% after having declined approximately 1% in the previous session, while the NASDAQ rose 0.90%, indicating tech sector participation in the broader market advance [3].

European markets exhibited even more pronounced reactions, with the pan-European Stoxx 600 advancing 1.4% in a broad-based rally that encompassed multiple sectors and countries [4]. Germany’s DAX and France’s CAC both posted 1.4% gains, representing significant recovery from recent pressure points [3][4]. The FTSE 100 rose 0.8% to approximately 10,225, marking its first weekly gain in several weeks and reflecting investor confidence in the transatlantic trade relationship stabilization [4].

The small-cap Russell 2000’s outperformance (+1.35%) carries particular significance, as these domestically-focused companies are typically most sensitive to domestic policy developments and trade tensions. Their strong performance suggests investors view the tariff cancellation as a meaningful reduction in near-term economic policy risk [3].

The immediate catalyst for the tariff cancellation was a framework agreement on Arctic security negotiated between President Trump and NATO Secretary General Mark Rutte [1][6]. The agreement reportedly involves potential expanded U.S. military bases on Greenland, representing a significant strategic development in the NATO alliance’s northern posture. However, the “preliminary deal” and “framework of a future deal” language employed by administration officials indicates that specific terms, timelines, and commitments remain to be negotiated [1][4].

President Trump emphasized during his Davos announcement that the U.S. still seeks to acquire Greenland “including right, title and ownership,” while simultaneously stating that military force would not be employed to achieve this objective [1]. This nuanced position maintains long-term pressure on the sovereignty question while providing immediate de-escalation on the tariff front, creating a complex diplomatic landscape that markets must navigate.

The EU’s institutional response to the tariff threat and subsequent cancellation reveals significant underlying strain in the transatlantic relationship. Just hours before the tariff cancellation announcement, the European Parliament had formally suspended ratification of a U.S.-EU trade deal that would have established 0% tariffs on industrial exports [2]. MEP Bernd Lange stated explicitly that “until the threats [on Greenland] are over there will be no possibility for compromise,” indicating that the institutional damage from the tariff threat may persist beyond the immediate cancellation [2].

European Commission President Ursula von der Leyen cancelled her planned Davos meeting with President Trump, a significant diplomatic snub that underscores the depth of EU concern regarding the Greenland situation [2]. EU leaders convened an emergency summit on January 21, 2026 at 7pm Brussels time to coordinate their response, having prepared in advance a €93 billion retaliatory tariff framework under the EU’s “anti-coercion instrument”—described by officials as a “trade bazooka” and “nuclear deterrent” against economic pressure [2].

The tariff cancellation has reinforced market characterization of the administration’s trade policy approach as the “TACO trade” (Trump Always Chickens Out), a pattern that has now demonstrated sufficient recurrence to influence risk management strategies [4][5]. Market analysts at Deutsche Bank, as noted by Jim Reid, observe that markets have developed an expectation framework that prices out escalatory scenarios with increasing confidence [4]. This pattern carry implications for future trade negotiations, as counterparties may incorporate this behavioral expectation into their negotiation strategies.

The TACO trade dynamic creates a form of “credibility paradox” for the administration—while repeated tariff reversals generate short-term market relief, they may reduce the long-term coercive effectiveness of tariff threats in future negotiations [5]. Market participants, according to CNBC analysis, have begun positioning around this pattern, creating self-reinforcing expectations that could influence diplomatic outcomes [5].

Despite the positive market reaction to the tariff cancellation, fundamental structural issues in the U.S.-EU relationship remain unaddressed. The EU Parliament’s suspension of trade deal ratification represents an institutional barrier that cannot be easily reversed through executive action [2]. The €93 billion retaliatory tariff framework, while not immediately deployed, remains activated and could be employed if future disputes arise [2].

The diplomatic damage from the confrontation—exemplified by von der Leyen’s cancelled meeting—may have longer-term consequences for EU-U.S. cooperation on other matters, including technology regulation, climate policy, and security coordination beyond the Arctic [2]. The Arctic framework agreement itself remains vague on specifics, creating uncertainty about its durability and implementation timeline [1][4].

The market reaction suggests sector rotation strategies may require adjustment in light of the de-escalation. European-focused equities, particularly in luxury goods (LVMH), automotive (BMW, Mercedes), and industrials, experienced relief that may prove temporary if trade relationship tensions resurface [4]. The currency implications, noted by MUFG analysts, suggest potential EUR strength if trade tensions continue to de-escalate, which would carry its own sector-specific impacts [4].

The most significant near-term risk derives from the vagueness of the Arctic security framework agreement. As a “preliminary deal” with limited concrete commitments, the agreement faces substantial implementation risk [4]. Markets have priced out escalatory scenarios, but negotiations could stall, encounter institutional resistance (either from NATO members, Greenland’s local government, or EU institutional bodies), or fail to produce the anticipated military basing arrangements [1][4]. Any breakdown in framework implementation could reignite tariff threats and associated market volatility.

The EU’s institutional response—particularly the Parliament’s trade deal suspension and the activation of the anti-coercion instrument—demonstrates that the European Union maintains significant policy tools and institutional resolve in response to perceived economic coercion [2]. Even with the immediate tariff threat removed, the EU’s prepared €93 billion retaliation framework represents a credible deterrent that constrains future U.S. trade policy flexibility. The suspended trade deal ratification may prove difficult to resume given domestic political pressures within EU member states [2].

President Trump’s explicit continuation of the desire to acquire Greenland, while ruling out military force, maintains a fundamental source of transatlantic tension [1]. The sovereignty question remains unresolved and could resurface as a flashpoint in future negotiations or public statements. Any escalation on this front would likely trigger similar market responses in reverse, demonstrating the persistent vulnerability of current market gains to geopolitical developments.

The tariff cancellation creates a window for de-escalation that could stabilize transatlantic trade relationships if effectively managed. European Commission and Council statements following the January 21 emergency summit will provide important signals about whether the EU views the tariff cancellation as sufficient to begin relationship repair, or whether deeper institutional damage has been done [2]. Effective diplomatic engagement in the coming weeks could capitalize on the current de-escalation to rebuild trade deal momentum.

The January 21, 2026 tariff cancellation represents a significant but conditional de-escalation in transatlantic trade tensions, with markets responding positively to reduced immediate risk while underlying geopolitical and institutional concerns persist. Key quantitative markers include the 0.9-1.4% gains across global equity indices, the €93 billion retaliatory tariff framework maintained by the EU, and the February 1 implementation deadline that has now passed without tariff activation [3][2][6].

The NATO Arctic security framework agreement provides diplomatic cover for the tariff reversal but lacks the concrete details necessary to assess its long-term viability [1][4]. The EU’s institutional response—the suspended trade deal ratification and emergency summit—indicates that relationship repair will require sustained diplomatic engagement beyond the immediate tariff issue [2].

Market participants should monitor NATO framework implementation progress, EU summit statement language and subsequent policy positioning, Congressional reaction to the Arctic security arrangement, and currency market movements reflecting evolving trade tension expectations [4]. The TACO trade pattern’s demonstrated reliability may inform risk management approaches, though repeated reversals could reduce future threat credibility.

The fundamental tension regarding Greenland sovereignty remains unresolved, with potential to resurface as a market risk factor. All stakeholders should recognize that the current market rally reflects conditional de-escalation rather than structural relationship resolution.