Reviving the 'TACO' Trade: Market Reactions to Trump's Policy Shift

Market Reactions and Economic Insights

ORLANDO, Florida, Jan 22 (Reuters) - World stocks leaped on Thursday after U.S. President Donald Trump agreed a framework of a deal on Greenland and withdrew his threat to slap new tariffs on several European nations, while investors also cheered upbeat U.S. economic data.

More on that below. In my column today I look at the "Sell America" narrative that is back with a vengeance, and pose the question: will Trump's bellicose policy agenda prompt the world to reduce its $27 trillion "long USA" position?

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

1. Trump touts "total access" Greenland deal as NATO asksallies to step up 2. EU leaders worry about handling "bully" Trump despiteGreenland U-turn 3. Greenland storm barrels into "hyper bull" market: MikeDolan 4. U.S. consumer spending increases solidly in October andNovember 5. Trump sues JPMorgan, CEO Jamie Dimon for $5 billion overalleged political debanking

Impact of Trump's Policy Changes

Today's Key Market Moves

* STOCKS: Markets around the world rise. Wall Street up asmuch as 0.8%, Russell 2000 hits new high, Europe has best day intwo months, Japan's Nikkei +1.7%, Brazil's Bovespa +2% to newhigh. * SECTORS/SHARES: Seven sectors on the S&P 500 rise, fourfall. Communications services +1.6%, real estate -1.1%. Meta+5.5%, General Electric -7.4%. * FX: U.S. dollar index -0.5%. Biggest G10 FX gainers vsgreenback are AUD, NZD, SEK, NOK, all up around 1%. * BONDS: U.S. yields up 1-3 bps. JGB yields fall ~5 bpsacross the curve, retracing some of recent selloff. * COMMODITIES/METALS: Oil falls ~2%, precious metals rallystrongly - gold hits record above $4,900/oz, silver +3%,platinum +6%.

Current Economic Indicators

Today's Talking Points

* Return of the 'TACO' trade

Trump's climb-down on Greenland and on the threat of new tariffs on Europe probably had several explanations, but one of them is surely the adverse U.S. market reaction earlier this week that saw Wall Street, Treasuries and the dollar all fall sharply together.

With mid-term elections looming in November, the affordability crisis is a priority. Mortgage rates are falling but they've not been below 6% since 2022, and more than half of current mortgages are higher than 6% - the last thing Trump wants is a spike in long-term yields and a stock market slump. It seems the "Trump always chickens out" trade is alive and well.

* The U.S. growth juggernaut

For all the teeth-gnashing over trade wars, inflation, and global geopolitical fractures, the U.S. economy seems pretty robust. Third-quarter GDP was revised up to a 4.4% annualized rate on Thursday, the fastest pace in two years, and sharply up from 3.8% in the second quarter.

Fourth-quarter growth looks even stronger, with the Atlanta Fed's GDPNow model currently tracking 5.4%. Figures like these bolster the view that growth and inflation risks are skewed to the upside. And if that's the case, why is the Fed cutting rates?

Bank of Japan's Policy Decisions

* Bank of Japan meeting

The BOJ announces its latest policy decision on Friday. The backdrop could not be more challenging - the yen is languishing at historic lows, the bond market is tanking, long-dated yields have rocketed, and the government wants to accelerate spending.

The problem is, offsetting all that with aggressive policy tightening risks torpedoing the bond market. Markets are pricing in a 25-basis-point hike by July and only 20 bps after that - clearly not enough to support the yen. It's a delicate balancing act.

What could move markets tomorrow?

* World Economic Forum in Davos. Speakers include IMFManaging Director Kristalina Georgieva and ECB PresidentChristine Lagarde * Japan interest rate decision * Japan inflation (December) * Japan PMI (January, flash) * Taiwan industrial output (December) * UK retail sales (December) * UK PMI (January, flash) * Bank of England's Megan Greene speaks * Euro zone PMI (January, flash) * Canada retail sales (December) * U.S. University of Michigan inflation, consumerexpectations (January, final)

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

(By Jamie McGeever; Editing by Nia Williams)