In a significant geopolitical shift, US President Donald Trump has withdrawn tariff threats previously aimed at European allies, as part of his ongoing pressure campaign to secure control of Greenland. This de-escalation has triggered a notable rally in global sharemarkets, with Australian stocks experiencing a sharp upturn on Thursday.
Market Response and the 'TACO' Trade Strategy
The benchmark S&P/ASX 200 index briefly surpassed the 8,860 point mark, recovering a portion of recent losses, before settling slightly lower. This market movement rewarded dip buyers who have capitalised on the so-called "Trump Always Chickens Out" or TACO trade strategy. This approach relies on the expectation that the American leader will ultimately back down from tariff threats after declaring a form of victory, a pattern that has played out once again.
Geopolitical Tensions and Investor Sentiment
Trump has claimed to have established a "framework of a future deal" concerning Greenland, though details remain sparse. However, Danish parliament member Sascha Faxe cast doubt on this assertion in an interview with Sky News, stating that any deal without Greenland's involvement in negotiations is "not real." Despite this uncertainty, the easing of tensions has buoyed investor confidence.
Veteran financial markets commentator Michael McCarthy noted that while risks are accumulating in the market, current indicators are positive following the reduction in geopolitical strain. "We've seen several events that historically might have prompted a significant equity market correction, yet investors have largely dismissed them," McCarthy explained from the online trading platform Moomoo.
Potential Triggers for Market Correction
McCarthy highlighted several factors that could precipitate a sustained global equity downturn, including an inflation outbreak, a serious escalation in geopolitical tensions, and the risk of a sell-off in US bonds. A bond sell-off would signal diminishing investor faith in US political and economic policies, potentially causing widespread market reverberations.
Detailed Scrutiny of the Greenland Framework
Chris Weston, head of research at Melbourne-based financial firm Pepperstone, emphasised that investors will require more clarity on Trump's Greenland framework before fully discounting further risks in Europe. "Many will seek to understand the intricacies of any agreement, including what is genuinely at stake and how it is presented from the European perspective," Weston remarked.
Commodity Prices and Inflationary Pressures
Australia's resource-heavy share market has benefited from strong commodity prices, with resilient iron ore demand and gold and copper trading near record highs. Concurrently, persistent inflation and the increasing likelihood of a near-term interest rate hike have constrained stock market gains.
The ASX's upward momentum paused on Thursday following the release of an Australian jobs report showing a surge in employment, which heightened expectations of a rate rise as early as next month. Rising interest rates typically negatively impact stocks by increasing borrowing costs and making alternative investments like bonds more appealing.
Market Performance and Currency Movements
By Thursday afternoon, Australia's benchmark index had risen approximately 0.6%, adding around $17 billion in market value and recovering about half of the losses incurred over the past week. Additionally, the Australian dollar reached a 15-month high against the US dollar, trading near the US68c mark, reflecting broader market optimism.
