Weekly market wrap: geopolitical tensions, US Economic data ahead of Fed’s decision

Last week witnessed significant developments on the geopolitical front, alongside key indicators of U.S. economic performance and notable updates from the Davos Economic Forum.

At the start of the week, financial markets were dominated by concerns over geopolitical tensions, particularly the renewed fears of a trade dispute between the United States and several European nations due to conflicting positions over Greenland and President Donald Trump’s desire to acquire it.

However, the escalation of these tensions — which weighed heavily on the U.S. dollar, given that the United States is a central party to the dispute — was not the only source of anxiety for markets. Economic data also played a prominent role throughout the week.

U.S. growth and inflation figures revealed that the American economy expanded more strongly than expected in the third quarter of last year. Inflation data also indicated that price stability in the United States has shown notable improvement in recent months.

The U.S. Dollar

The U.S. dollar ended last week with a negative close after several eventful trading sessions. These economic readings significantly boosted expectations of interest‑rate cuts throughout the new year, gradually turning the dollar into a lower‑yielding asset.

The U.S. Dollar Index, which measures the currency against a basket of major peers, fell to 97.50, compared with 99.10 the previous week. The index reached a weekly high of 99.39, while the lowest level recorded was 97.46.

President Trump’s push to assert control over Greenland revived fears of renewed trade clashes with Europe, with no signs of de‑escalation in sight. He also threatened to impose high tariffs on French champagne after President Emmanuel Macron refused to join a U.S.-led initiative — a stance Trump later reversed by the end of the week.

Rising tensions over Greenland also raised concerns that European investors might offload dollar‑denominated assets, adding further pressure on the U.S. currency.

At Davos, President Trump reiterated his intention to begin immediate negotiations to acquire Greenland, stressing that he would not resort to force to achieve this.

Economic Data

Revised U.S. GDP figures for the third quarter exceeded market expectations on Thursday, boosting optimism across global financial markets. Wall Street indices rose, while the U.S. dollar weakened.

Annualized GDP growth for Q3 was revised up to 4.4%, surpassing both forecasts and earlier preliminary readings. Markets had expected 4.3%, matching the initial estimate, indicating a modest improvement in U.S. growth during that period.

The GDP price index rose 3.7%, unchanged from the preliminary reading and in line with expectations.

On inflation, the Personal Consumption Expenditures (PCE) index — the Federal Reserve’s most trusted inflation gauge — rose 0.2%, below the previous 0.3% reading. The annual PCE rate reached 2.7% in October, slightly lower than the 2.8% recorded a year earlier.

Core PCE (excluding food and energy) rose at the same monthly pace as before, while the annual rate stood at 2.7%, down from 2.8% the previous year.

Equities: The Week’s Biggest Winner

Last week brought another wave of unsettling geopolitical headlines after President Trump threatened to raise tariffs on several European trade partners — a development that ultimately boosted global equity markets.

Although the escalation initially rattled investors, concerns eased quickly, shifting attention back to economic fundamentals and corporate earnings, the key drivers of short‑term market direction.

With political tensions subsiding, markets now look toward this week’s Federal Reserve meeting. The central bank is widely expected to keep interest rates unchanged for now, with the possibility of another cut later this year. This stance reflects the Fed’s attempt to balance inflation pressures with the need to support economic growth.

Meanwhile, a heavy slate of earnings reports — particularly from major AI companies — will provide an important test of profitability in the sector and shed light on whether earnings growth is broadening across the wider economy.

Global equity indices ended the week with strong gains compared with the previous week.

Broadening Business Growth

Current indicators suggest that a combination of improving economic growth, falling interest rates, and strong corporate profitability may lead to a broader market leadership this year, rather than relying on a handful of mega‑cap companies as in recent years.

This potential shift strengthens the case for diversified investment portfolios, offering a more balanced approach capable of capturing opportunities across multiple sectors.

Overall, markets appear to be entering a phase marked by relative political calm and renewed focus on core economic data. If these trends continue, the year ahead could bring a more widespread and inclusive global market recovery.

U.S. Bond Market Under Pressure

Long‑term U.S. Treasury bonds came under heavy pressure on Tuesday as investor anxiety grew following President Trump’s announcement of a 10% tariff on imports from eight European countries starting next month.

This triggered a broad sell‑off in the roughly $30 trillion bond market, pushing the 10‑year Treasury yield toward 4.310%, near a five‑month high. The 30‑year yield jumped to 4.950%, approaching its highest level in more than four months.

Long‑term bonds were on track for their biggest daily loss since July 11, 2025, when renewed fears of trade wars with Canada and Europe sparked another sell‑off.

Bond yields rise when prices fall — a typical outcome during large‑scale selling.

Bonds as a Mirror of Geopolitical Anxiety

U.S. Treasuries have long been a key instrument for investors to express concerns about geopolitical tensions and U.S. inflation risks.

Europe is one of the largest holders of U.S. debt, with the eurozone, Belgium, Luxembourg, and Ireland collectively owning more than $1.5 trillion in Treasuries.

Trump’s latest threats were poorly received by European investors. Reports indicated that Denmark’s pension fund AkademikerPension plans to exit U.S. Treasuries by the end of the month.

Amid the noise created by Trump’s statements, U.S. assets appear less attractive in the near term, and financial conditions may not be stable enough to support strong investment flows.

Greenland and Japan Take Center Stage

Movements in the U.S. bond market reflect multiple global concerns. Tensions over Greenland — and Trump’s threat of massive tariffs unless an agreement is reached to make the world’s largest island part of the United States — have raised short‑term fears about economic growth and increased expectations of monetary easing.

They have also fueled longer‑term concerns about inflation and financial risks, contributing to a steepening yield curve, meaning a widening gap between short‑ and long‑term yields.

Developments in Japan

Investors are also watching whether Japanese Prime Minister Sanae Takaichi can deliver a major fiscal stimulus package. Her pledge to temporarily cut the sales tax on food has strained Japan’s fiscal outlook and pushed Japanese government bond yields to their highest level in 27 years.

Rising 10‑year Japanese yields have supported the yen.

Despite these concerns, the U.S. bond market remains the world’s largest and most liquid, and central to the global financial system. Any significant decline in its role would take considerable time, and fears of a prolonged sell‑off remain premature.

Bitcoin Losses Amid Trade Tension Fears

Bitcoin suffered steep losses last week for several reasons, most notably concerns over trade tensions following Trump’s latest threats related to Greenland.

The digital asset market lost billions of dollars as Bitcoin and other cryptocurrencies fell sharply, driven by widespread investor fear.

Total crypto market capitalization dropped to $3.09 trillion, after losing about $45 billion in just 24 hours — the first such decline of the week. Bitcoin fell roughly 8% amid heavy selling pressure, likely tied to fears of a U.S.–EU trade war.

Euro and Pound Strengthen

European currencies — the euro and the British pound — capitalized on the weakness of the U.S. dollar to post weekly gains.

Each currency also benefited from supportive economic data.

The euro strengthened after improved confidence in the eurozone economy. Germany’s ZEW economic sentiment index surged 13.8 points to 59.6, its highest level in four and a half years, far exceeding expectations of 50.0.

The British pound also rose against the dollar, supported by a relatively positive market reaction to the latest U.K. labor data, despite its mixed nature.

U.K. job growth reached 82,000 in the three months ending November, far above expectations of 27,000. Unemployment remained unchanged at 5.1%, its highest level in several years. Wage growth continued to slow, though still outpaced inflation.

Overall, the data was strong enough to support the pound on Tuesday, allowing it to gain against the weaker dollar.

This Week: Fed Decisions in Focus

Markets are now closely watching the Federal Reserve’s upcoming decisions — particularly after Chair Jerome Powell broke his silence to respond to the Justice Department’s notice that it is opening a criminal investigation into him over the costs of renovating Federal Reserve buildings.

This week’s interest‑rate decision carries added weight, as it follows GDP revisions showing stronger U.S. economic performance.

PCE inflation readings — the Fed’s most trusted gauge — also highlighted stable price growth and progress toward the central bank’s inflation target.

This will be the Fed’s first interest‑rate decision of 2026.

The FOMC cut rates in two consecutive meetings in 2025, but several members now believe the committee should pause before making further cuts, pending clearer signals from upcoming employment and inflation data.

Next week will also bring earnings reports from several of the “Magnificent Seven” companies, which are expected to significantly influence market movements.