US stocks rally as Trump softens tone on Greenland, backs off tariff threat

President Donald Trump’s clash with European leaders over Greenland prompted investors to sell US assets earlier this week — but the market pain eased Wednesday as the president struck a softer tone, saying he will not levy his recently threatened tariffs on imports from some European countries.

Stocks rebounded this morning after Trump said he would not use “excessive strength and force” to acquire Greenland, though the president maintained his insistence on acquiring the Danish territory. Stocks jumped higher and extended gains in the afternoon after Trump posted on social media saying he had a productive meeting with Mark Rutte, the secretary general of NATO, and will not be imposing his planned tariffs on European countries that were set for February 1.

Stocks finished the day with solid gains, regaining some ground after suffering their worst day since October on Tuesday.

The Dow gained 589 points, or 1.21%, reversing course after dropping 871 points on Tuesday. The S&P 500 closed higher by 1.16% and had its best day since late November. The tech-heavy Nasdaq rose 1.18% and had its best day in just over one month. The S&P 500 is just 1.6% away from a record high.

“Based upon a very productive meeting that I have had with the Secretary General of NATO, Mark Rutte, we have formed the framework of a future deal with respect to Greenland and, in fact, the entire Arctic Region,” Trump wrote on Truth Social.

The sharp reversal from Trump was met with swift relief in markets: The S&P gained as much as 1.67% at its afternoon peak before paring some gains. Although a sharp change in tone, some analysts had expected Trump to back down from his tariff threats — The “Trump Always Chickens Out,” or TACO, trade has become a popular theme on Wall Street.

While uncertainty remains about the framework of the deal, Wall Street rallied on the shift in tone.

“Looks like it’s TACO Wednesday,” Art Hogan, chief market strategist at B. Riley Wealth Management, told CNN.

Volatility picked up before Trump struck a softer tone

Investors this week initially revived the “Sell America” trade, dumping US stocks, bonds and the dollar. Stocks on Tuesday suffered their worst day since October and the dollar had its worst day since August.

Few things can seemingly change Trump’s mind, but a negative market reaction is one of them. The “Sell America” trade prompted analysts to question whether market turmoil would make the president reconsider his confrontation with Europe.

Some analysts said the clash with Europe might not deliver a big enough shock to markets to prompt him to change course. But all agreed that a key indicator would be the bond market.

Treasury yields, which rise when bonds fall, rose on Tuesday to their highest level since September. A surge in Japanese government bond yields also put pressure on Treasuries, adding to market jitters.

Ten-year and 30-year Treasury yields set interest rates across the US economy. When investors sell Treasuries, yields rise, lifting borrowing costs for the US government, businesses and consumers. A sustained sell-off could have sent yields soaring higher, becoming a thorn in the government’s side and raising borrowing costs.

“The only thing stronger and more intimidating than Trump is the US bond market,” Neil Wilson, strategist at UK trading platform Saxo Markets, said in a note. “The bond market is perhaps that only thing that will stop Trump going all the way on Greenland.”

The “Sell America” trade hearkens back to the spring, when Trump’s unveiling of his so-called “Liberation Day” tariffs rocked global financial markets and investors sold simultaneously sold stocks, bonds and the dollar on a more dramatic scale.

Treasury yields spiked higher in April in a manner so aggressive and abnormal that the Trump administration decided to pause most of its planned tariffs for 90 days. Bond investors were getting “yippy,” Trump said. Turmoil in the bond market — which influences borrowing costs across the US economy — prompted the president to walk back his most severe tariff threats.

The market stress on Tuesday was not nearly as significant as April, and it’s unclear whether it factored into Trump’s and Rutte’s reconciliatory conversation. Either way, the “Sell America” trade reversed Wednesday afternoon: Stocks rose, the dollar slightly strengthened against other currencies and US bonds rallied, pushing yields lower.

“The Greenland crisis appears to be defusing and reversing the recent sell-off, although details are still forthcoming around the ‘framework’,” Eric Teal, chief investment officer at Comerica Wealth Management, said in an email.

TACO or TATA?

The initial stock market dip on Tuesday was relatively contained compared to past bouts of trade uncertainty in part because investors are more aware of the impact of tariffs and there is skepticism that Trump would actually go through with a serious attempt to take over Greenland. TACO has become a common refrain on Wall Street.

Investors bet that Trump will back off when necessary to boost the markets, so they hold their breath, and their stocks.

“The markets have learned that these corrections don’t last, therefore, no reason to panic,” said Ethan Harris, former head of global economics at Bank of America.

But instead of TACO, the president’s policy approach should be understood as “Trump Always Tries Again,” or TATA, according to Harris. Trump has paused and delayed his policies to appease markets when necessary — but eventually pursued his original goals, he said.

“Much like the climbdown in last year’s trade conflict with China, today’s reversal should help stabilize the dollar and ease short-term volatility by removing a major tail risk for markets — but 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,” Karl Schamotta, chief market strategist at Corpay, said in a note.

European countries own about $8 trillion worth of US stocks and bonds, according to Deutsche Bank. A sell-off in US Treasuries could have pushed borrowing costs higher. But it would have also taken enormous coordination and carried risk of fueling volatility in global markets.

The EU has its “trade bazooka,” which could impact US businesses, including big tech companies that have driven market gains in recent years. But after Trump and Rutte struck a friendlier tone on Wednesday, it’s uncertain what further measures will be necessary or what deal will ultimately be agreed upon.

“There are some tail risk scenarios like anti-coercion and the US confrontationally taking Greenland. That’s not our base case,” Arun Sai, senior multi-asset strategist at Pictet Asset Management, told CNN on Tuesday. “So, as long as it doesn’t escalate to those kind of scenarios, I think market action would be pretty muted. The volatility is going to be short-lived, much less pronounced than the ‘Liberation Day’ sell-off we had.”

CNN’s Matt Egan contributed reporting