The yen held steady in early trading on Tuesday after Japanese Prime Minister Sanae Takaichi officially called early elections next month. Investors are on edge ahead of Tuesday’s auction of 20-year Japanese government bonds.Trump’s threat to tax countries that resist his attempt to control Greenland has reignited the market volatility seen early in his second term. European backlash and talk of retaliation have deepened the sell-off as investors have sought refuge in precious metals amid rising tensions and renewed attacks on the Federal Reserve’s independence.
“The nervousness is palpable,” said Alexandre Baradez, chief market analyst at IG in Paris. “All in all, so many problems are piling up – from credit cards to Fed independence and tariffs – that I really see no reason for the stock markets to continue to break new records.”
The impasse comes as resilient profits and continued investment in artificial intelligence have supported risk appetite. The direction of the market now depends in part on the European Union’s response, with the bloc considering tariffs on €93 billion ($108 billion) of US goods.
French President Emmanuel Macron planned to request the activation of the EU’s so-called anti-coercion instrument, Bloomberg reported this weekend. However, German leader Friedrich Merz said on Monday that his country’s greater dependence on exports means the country is less willing to unleash the countermeasure. “With Wall Street closed, markets have not had a full opportunity to discount the fallout from the latest escalation in geopolitical risk,” Kyle Rodda, a senior analyst at Capital.com, wrote in a note. “There will be a keen eye on Davos and what the US does and US President Donald Trump says about his attempt to acquire Greenland.”
Trump will address the World Economic Forum in Davos on Wednesday.
In Asia, investors will keep an eye on Japanese government bonds on Tuesday after the election announcement. Bond yields rose on Monday after reports of a tax cut proposal revived concerns about Takaichi’s stance on fiscal policy.
Yields on 30-year bonds rose 10 basis points to 3.61%, the highest level since debut, while yields on 10- and 20-year bonds rose to their highest levels since 1999.
The Prime Minister also said the vote would provide a mandate for fundamental changes to strengthen both economic and defense policies, adding that no one will help a country that cannot help itself.
Elsewhere, in more signs of geopolitical tension, China sent a military drone into Taiwanese airspace for the first time, underscoring Beijing’s efforts to test the self-ruled democracy’s defenses. The Chinese military said on social media that the plane was conducting “legitimate and lawful” training.
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