Wall Street is again relying on the TACO trade after being ‘burned’ by trusting Trump in the past

Investors are striving to stay calm amid escalating tensions between the U.S. and Europe, with many drawing on their experience from Liberation Day as a guide for how to navigate

Analysts are understandably uneasy. Their concern stems from President Trump’s claim that a would face new tariffs within a matter of weeks if they did not support America’s , currently a territory of NATO member Denmark, which is not putting the island up for sale.

As of this writing, the VIX volatility index has risen 27% over the past five days—its highest level since April last year, when the White House announced sweeping tariffs on every nation on the planet. U.S. markets have yet to react to the news, as they were closed for the Martin Luther King holiday, but European assets are showing weakness.

Germany’s DAX is down 1.57% at the time of writing, London’s FTSE has fallen 1.4% and France’s CAC 40 is down 1.2%. Asia markets are similarly jittery: Tokyo’s Nikkei 225 is down 1.11% while Hong Kong’s Hang Seng Index has dropped 0.29%. A preview of U.S. trading comes from futures, with the S&P 500 trending down 1.75% as of this writing.

Meanwhile, gold prices—a barometer for investors fleeing to safety—are , up 1.17% overnight.

Still, the damage could have been worse: investors don’t need to look further than a year ago for context. Markets plummeted following Trump’s Rose Garden address on April 2 (his so-called Liberation Day), even though many of his threatened tariffs were delayed within days. That’s how the “TACO” trade was born: Trump Always Chickens Out.

Jim Reid of noted to clients this morning that there’s “room for bigger moves” in markets, and highlighted that Trump’s tariff impositions on key trading partners are already on shaky ground. This is due to an imminent Supreme Court ruling on whether the White House’s initial round of tariffs was carried out legally. This “might end up further constraining Trump’s room for maneuver on tariffs. However, no one knows when this will come through (apart from maybe the judges).”

“The market has been burnt before by overreacting to tariff threats,” Reid continued. “Obviously, there was Liberation Day—but more recently, Trump’s October escalation with China prompted a 2.71% drop in the S&P 500 that day, before he met with Xi and extended the trade truce by a year.”

UBS chief economist Paul Donovan described a rational market: “Investors and the U.S. administration are likely to keep focus on the U.S. bond market, which weakened modestly after Trump’s latest tariff threats. Additional tariffs would mean more U.S. inflation pressures and a further erosion of the USD’s reserve currency status. So far, bond investors don’t seem to be taking the threats too seriously.”

Markets also “dismissed” another jab from Trump aimed at French President Macron—threatening tariffs on champagne and Bordeaux if the European leader refuses to contribute $1 billion to the Board of Peace for Gaza.

Unconvinced traders

Further evidence of TACO traders comes from Polymarket. At the time of writing, of betters believe all the tariffs Trump has threatened against Europe will take effect on February 1. A smaller 40% minority think any tariffs will be implemented in a fortnight’s time.

Odds are also declining on a country-by-country basis. For example, Denmark leads as the most likely country to face U.S. levies, but that still remains an unlikely outcome at 40% and falling. France’s tariff odds are at 38%, while Norway’s are at 37%.

Political polling—especially with November’s midterm elections approaching—may support the idea that the president will reverse course again. Trump’s approval ratings have been declining , with nine in 10 saying they opposed taking Greenland by military force. A further found just 17% of voters back Trump’s efforts to acquire Greenland.

However, if investors—or foreign governments—rely too heavily on the idea that Trump will back down, they could regret it. After all, if the White House sees markets behaving relatively stably, this could give him the confidence to push ahead with the very plans investors are betting against. As framed Trump’s August 1 tariff deadline last year: “The paradox is that as markets discount the tariffs and perform strongly, that’s actually making the higher tariffs more likely as the administration grows in confidence.”