Global markets snapped back on Thursday as investors started winding back a fast-built risk-off trade after US President Donald Trump said he would not proceed with the additional tariffs on 8 European nations that had been flagged to start on February 1 and that he’s ruled out taking the territory by force. He cited a “framework” for a future Greenland-related deal reached with NATO Secretary-General Mark Rutte.
The shift reduced the probability of escalation in the near future and in practice gave markets the motivation to rotate out of defensives and safe havens after a surge earlier in the week and back into risk assets.
European equities and currency
European markets, which carried the initial brunt of the tariff headline and was barometer for whether the shock from tariffs were real and would extend, steadied as markets saw the Davos messaging as de-escalatory. The key takeaway is that uncertainty can move markets quickly, but markets can also fade it quickly when the probability of implementation falls and certainty begins to build again.
Risks on EU retaliation on US imports are also to fade way, further boosting deescalation sentiment.
In currencies, the “tell” is whether the US dollar continues to behave like a safe haven or starts to trade more like a confidence barometer. Initially it reflected heightened risk, with the US dollar selling off sharply as tariff fears peaked. The euro and sterling both rallied around 1% over two sessions against the dollar, while the Swiss franc strengthened on haven demand. De-escalatory comments in Davos saw volatility cool, the dollar claw back some losses, the franc ease from its highs, and gains in the euro and sterling retract partially. The AU dollar also firmed, rising about 0.3%, tracking the broader improvement in risk sentiment rather than domestic drivers.
US markets: risk appetite resets
Wall Street led the rebound after reopening from the long weekend to the sharpest single-day decline since October. The Dow rose 1.4%, while the S&P 500 and Nasdaq gained 1.5% and 1.6%, respectively as investors rotated back into risk assets as uncertainty cooled down. The gains were broad-based, with declining volatility and uncertainty reinforcing the improvement in sentiment.
The rally reflected relief rather than fresh optimism. Markets responded to the reduced probability of tariffs taking effect and of military action, allowing focus to shift back toward earnings and business macro fundamentals rather than headline-driven uncertainty and risk from policy.
ASX: Flow-Through from Global Relief
The ASX followed the global sentiment. ASX 200 futures pointed higher by about 0.5%, positioning the local market to break a 3-day losing streak and to claw back losses after tariff jitters weighed on sentiment earlier in the week. Banks and growth stocks tracked the rebound offshore, while gold miners remained supported by elevated bullion prices despite but gains are expected to cool as safe-haven demands dips down.
The Australian dollar rose around 0.3%, reflecting improved risk appetite and a partial reversal of defensive positioning built up during the height of the tariff scare.
Safe Havens and Rates: Defensives Cool
Safe-haven assets moved in the opposite direction as risk appetite returned. Gold briefly surged above US$4,800 an ounce before paring gains and silver also cools from record levels. The pullback suggests investors are treating the tariff episode as a headline-driven shock rather than the start of a sustained risk-off regime.
US Treasury yields edged lower, reinforcing the relief-rally narrative and signalling reduced demand for protection, even as yields remain elevated by recent historical standards.
What to watch next
- Durability of the relief rally: 1 session confirms the de-escalation while multiple sessions and broad participation signals a genuine reset in positioning as well as sentiment. Keep an eye on whether gains extend beyond mega-cap stocks and if volatility continues to compress.
- Safe-haven signals: Gold and silver is still the best barometer of risk and uncertainty. Continuing pullback or cooling in growth suggests investors are comfortable fading the recent headlines, while renewed strength indicate want for protection and risk hedging despite the rebound in equities.
- FX follow-through: A stable sterling and euro with a softer US dollar reinforces the risk-on tone. Any renewed USD strength or euro weakness would be an early warning that markets are re-pricing growth or policy uncertainty.
- Rates response: Treasury yields easing alongside stronger equities supports the relief-rally narrative. Renewed rise in yields would suggest markets are shifting focus back to inflation or fiscal risk rather than geopolitics.
- Headlines: Markets have shown they are trading implementation probability, not rhetoric. Any shift in tone around tariffs, EU response, or negotiations could quickly reintroduce volatility.