TACO Strikes Again: Why Trump Retreated on Greenland?

At the World Economic Forum in Davos, US President Donald Trump temporarily suspended his highly publicised threats to seize Greenland. He has ruled out both military action and tariffs on European countries opposing his ambitions.

This reversal has come weeks after a period of aggravated geopolitical tension. Earlier the US President had raised fears of a North Atlantic Treaty Organisation (NATO) fallout (implosion). He had also refused to rule out sending troops to the NATO alliance territory.

Along with the retreat, President Trump had also suggested the introduction of his controversial ‘Board of Peace,’ to replace the United Nations. The ‘Board of Peace’ would demand a $1 billion joining fee from member states. Meanwhile, financial leaders like Citadel’s Ken Griffin used the World Economic Forum to warn that the US is on a path to a $40 trillion national debt.

The President’s decision to back down refers to a pattern that Wall Street calls the "TACO" principle. It means, ‘Trump Always Chickens Out.’ The term suggests that Trump’s aggressive bluster is usually followed by a strategic retreat when faced with unified resistance or market volatility.

The announcement has immediately calmed nervous markets. But the US President is also inviting controversial figures to his new peace board. So, the uncertainty is likely to remain in the coming days. The question for the investors is: what led to the sudden strategic pause and how can it impact the markets?

What Triggered the Pause?

The President’s retreat seems to be mainly driven by a deep internal division within his own administration. President Trump has already expressed a keen interest in acquiring Greenland for its missile-defence capabilities and rare minerals. But his top administration was reportedly split on how the acquisition can take place.

As per reports, officials such as Vice President JD Vance, Secretary of State Marco Rubio, and US Arctic Research Commission head Tom Dans had supported a cautious approach. Their focus was on negotiation and partnerships.

But officials such as White House Deputy Chief of Staff Stephen Miller reportedly pushed for annexation and military force.

As a result of this internal push-and-pull, there was an unstable policy environment. This chaos forced the White House to pull back their stance.

But with the administration visibly divided, can investors rely on US foreign policy remaining consistent in the near term?

Is ‘TACO’ Driving Market Sentiment?

In the past year, a trading strategy known as the "TACO trade" has gained traction on Wall Street. It involves betting on the President’s most severe threats. These trades are particularly regarding tariffs and trade wars to eventually end in a de-escalation.

The Greenland episode was a textbook example of this phenomenon. The US markets seem to have positively reacted to the pullback. It suggests that traders are once again putting faith in the TACO pattern.

However, the TACO trade has several risks. The President continues to assert his desire for Greenland. The markets cheer the de-escalation. But are traders underestimating the risk of a sudden policy reversal?

Market Takeaway

The Greenland incident has shown the global market the impact of the current US presidency’s volatility. Global markets are aware that the US President’s moods can seemingly dictate national policy.

The pulled-back incident has revealed the "dual realities" of the administration’s actions:

• On one hand, the US President can act as a master negotiator.

• On the other, his unpredictability can pose real risks.

Here are two main market takeaways for the Indian markets:

• Risk-On Sentiment - The de-escalation of US-Europe tensions can be seen as a net positive for emerging markets like India. Generally, a reduction in global geopolitical risk might lead to a softer US dollar. It can also encourage Foreign Institutional Investor (FII) flows into Indian equities. The "TACO" effect can suggest that the volatility can spike on headlines, but the actual implementation of disruptive tariffs might only be limited.

• Export Stability - India’s IT and service exports heavily depend on stability in the US and European markets. A trade war between the US and Europe might have dampened global growth forecasts. It could have indirectly impacted the demand for Indian services negatively. With the retreat from tariffs, the transatlantic trade corridor remains open, supporting export stability.

In conclusion, the global diplomatic tensions have cooled down as of now. So, should investors shift focus back to domestic fundamentals and fiscal health?

Source:

Economic Times

CNN

Bloomberg