The Overnight Report: Bond Rout Fells Equities

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This story features RIO TINTO LIMITED, and other companies.
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The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

The collision of rising Japanese bond yields and geopolitical tensions between the US and Europe over Greenland created a risk-off cocktail of selling with precious metals bucking the trend.

After a second day of selling on the ASX200 yesterday, futures are pointing to another weak start, albeit not to the same extent as US markets' falls overnight.

Good Morning,

The ASX200 fell for a second day on Tuesday, down -59pts or -0.7% to 8.816.

Banks and miners led the index down while utilities outperformed.

ANZ Bank, Australian Morning Focus, extract

A sharp sell-off in JGBs reverberated across global bond markets. 30y JGB yields rose 26.6bp to 3.85%, the highest on record, while 10y yields were up 9.1bp to 2.34%, the highest level since 1997. 

The moves reflected concerns over fiscal sustainability, after Prime Minister Takaichi called a snap election for 8 February earlier this week and signalled her intention to pursue a more expansionary fiscal policy, including a proposal for a two-year suspension of the 8% sales tax on food and beverages. 

The proposed sales tax suspension is expected to cost the government around -JPY5trn (about -0.75% of GDP) in lost revenue. The magnitude of the market reaction was substantial in comparison to the fiscal cost of the proposed package. 

While Japan has the highest level of net public debt in the OECD, at around 134% of GDP, it has been on a downward trajectory in recent years. The country’s current fiscal deficit is relatively small in comparison to other major economies (the smallest in the G7). 

In December, Japan’s Ministry of Finance projected the government would achieve a primary surplus in the 2026 fiscal year (the first in 28 years), while low interest rates have kept its debt-servicing costs as a share of GDP relatively low. 

Japan also has exceptionally strong external accounts and is the second-largest external creditor in the world (it was overtaken by Germany last year due to JPY depreciation).

Around 90% of Japan’s government debt is owned domestically (over 50% is owned by the Bank of Japan).

The extent of the sell-off drew a response from Japan’s Finance Minister Katayama who called for calm in the market.

What happened overnight, NAB Markets Today Research extract

The Greenland-US-EU spat continues to dominate headlines. It’s been the major contributor to weakness in equities and helped support precious metals to new highs overnight. The S&P 500 fell -2.4%, with declines across all sectors, erasing gains for 2026 to date.

European bourses were all in the red.

However, it’s been far from classic risk-off. The USD is weaker (DXY -0.3%). Developed market sovereign bond curves have all bear-steepened, with the 10Y US Treasury at 4.29%, the highest since mid-August after ultra-long-end JGB yields exploded higher yesterday. 20Y and longer yields were all up 20–30bp on the session, and the 40Y JGB yields are above 4.20%, up more than 40bp since last week. 

The USD (DXY) is down -0.8% in the past 24 hours, and the AUDUSD is up 0.3%. Despite the extreme volatility in JGBs, the USDJPY has been constrained, trading a 157.5–158.5 range.

Verbal barbs flew back and forth between President Trump, other White House officials, and a broad spectrum of European leaders and officials.

European Commission President von der Leyen said Europe would be “unflinching” in its response; the French president maintained a hard line. On the other side, Treasury Secretary Bessent advised Europe to “sit back, take a deep breath, do not retaliate”.

Commerce Secretary Howard Lutnick projected forward to what markets, in a collective sense, are probably seeing as the most likely outcome: “If we’re going to have a kerfuffle, so be it. But we know where it’s going to end. It’s going to end in a reasonable manner”.

The “sell America” or de-dollarisation theme got airplay after Danish pension fund AkademikerPension said it would divest itself of about -US$100m in Treasuries this month, citing fiscal non-sustainability of the US.

Whilst obviously tapping into the mood of the moment, we remain very wary of attempts to over-egg the sell America theme. It’s a trend that will be accelerated by current tensions, but in the very short term the alternatives aren’t there, and the risk of cutting off one’s nose to spite the face is quite high.

Meanwhile, the hard data got a bit lost amongst all the other volatility. In the UK, labour market growth was weak (payrolled employees -43k), but logically enough, wage pressures are moderating too, and that will give the Bank of England room to ease later this year.

In Germany, the ZEW survey was much stronger than expected. Germany’s ZEW expectations jumped to a 4-year high of 59.6 in January.

The current-situation index improved but remains deeply negative at -72.7 (vs -76.0 cons; -81.0 prior). Optimism is led by export-oriented sectors, but the survey predates the latest tariff/geopolitical jitters and doesn’t capture this week’s ~2.3% DAX pullback.

Greenland scenario analysis-Franklin Templeton, Kim Catechis extract

Geopolitical tensions have escalated following President Trump’s renewed intent to acquire Greenland and threats to impose tariffs of 10%, rising to 25% in June on countries that oppose the move. 

Talks between U.S. and Danish officials last week made no progress. In response, several European countries, including Germany, the Netherlands, Norway, the UK, and France have deployed troops to Greenland as part of a symbolic multinational show of support for Denmark. 

Under a 1951 defence agreement, the United States already has extensive rights to operate military bases in Greenland, including control over air and maritime movements. During the Cold War, the U.S. operated 17 bases before consolidating to one.

A 2004 amendment, signed by then–Secretary of State Colin Powell, explicitly recognizes Greenland as an equal part of the Kingdom of Denmark. 

Despite this, U.S. troop levels in Greenland have declined in recent years. Denmark’s response has shifted from surprise to defiance. As a committed NATO ally that has suffered proportionally higher casualties in Afghanistan than the U.S., Copenhagen views the pressure as unacceptable. 

Greenlanders share this stance: Polls suggest 85% oppose joining the U.S., citing reduced autonomy, weaker social protections, and loss of control over natural resources. Only 17% of Americans support acquiring Greenland.

There is no pressure from EU partners for Denmark to compromise. Prime Minister Frederiksen is well regarded in Brussels, and EU leaders view a U.S. military seizure as unlikely and self-defeating. Even in that scenario, officials believe NATO could endure, as Europe may not relinquish U.S. nuclear deterrence.

A forced U.S. takeover could likely trigger EU countermeasures, including sanctions, use of the Anti-Coercion Instrument, digital taxes on U.S. firms, and suspension of progress on a U.S.–EU trade deal. 

Danish lawmakers are already urging delays to proposed tariff reductions. Such a crisis could accelerate European defence autonomy and reinforce existing plans. EU officials also see little risk of a U.S. withdrawal from NATO or Ukraine, given that U.S. defence contractors benefit directly from higher European defence spending. 

The EU’s three-point approach includes expanded fishing access, infrastructure upgrades, and EUR94 million for education, skills, and clean energy. The EU has committed EUR225 million to Greenland in the current budget and plans to increase this to EUR530 million. 

Secondly, NATO’s “Arctic-7” framework calls for enhanced surveillance, space activity, and military operations. European troop deployments were announced in mid-January by France, Germany, Sweden, and Denmark, with France also contributing naval and air assets. These moves signal resolve and raise the cost of any unilateral U.S. action. 

And thirdly, quiet preparations are underway for a potential “hostile takeover,” alongside coordinated diplomatic outreach ahead of Davos and the Munich Security Conference. The EU Mutual Defence Clause (Article 42.7) obliges collective assistance in the event of armed attack. Broader geopolitical and economic implications.

The dispute benefits Moscow and Beijing. Russia sees an opportunity to fracture transatlantic unity, while China is capitalising on signs of Western disarray. Canada has renewed high-level engagement with China, and the EU’s newly concluded Mercosur trade deal would place the U.S. at a relative tariff disadvantage, possibly encouraging a thaw in EU-China relations. 

Economic fallout would be significant but uneven (UN Comtrade, 2024). The UK is most exposed in terms of goods exports to the US (16.9%.), followed by Germany (10%), Sweden (9%), France (7.9%), Finland (9.3%) the Netherlands (5%), Denmark (5.4%%), and Norway (estimate pending).

For the U.S., the EU accounts for 19% of exports, mainly energy and machinery. Defence supply chains are deeply intertwined—18% of the F-35 is European-made.

Energy is central, as it is the largest goods export. U.S. LNG exports to Europe surged after Russia’s invasion of Ukraine, but Europe’s electrification drive is expected to cut LNG imports by -20% by 2030 , and -18% by 2035, reducing long-term demand for U.S. supply. 

The strategic contrast in the background is stark: Washington is promoting fossil fuels, while Beijing offers scalable clean-energy infrastructure —solar, wind, batteries, grids, EVs, and drones— at falling costs. 

While de-escalation remains possible, any U.S. tariffs on EU members would prompt reciprocal action. The EU stands ready to deploy its Anti-Coercion Instrument, ironically designed with China in mind against the United States. It would probably focus on constraining the US’s access to the single market, involve tariffs on service exports and impose digital taxes on US tech companies. 

That would poison relations for the rest of this administration and almost certainly undo the US-EU trade deal, prompting tariff escalation from both sides. The European Commission’s commitment to unilaterally lower tariffs on US goods exports has been enshrined in a legislative proposal that is awaiting approval by the European Parliament.

At this point, approval seems unlikely, at least until the US’s intentions toward Greenland become clear.

Any attempt to acquire Greenland by the US would turbocharge the idea that Europe needs to do more for its own defence, accelerating and likely expanding existing plans.

Meanwhile the US defence sector would struggle to unpick its supplier relationship.

Corporate news in Australia 

-Glencore shareholders want Rio Tinto ((RIO)) to buy all assets, not just the best, and pay a premium

-Healthscope signals lenders to reject Pacific Equity Partners’ bid for the Prince of Wales Private hospital, citing a -$100m undervaluation

-Chemist Warehouse ((SIG)) and Genesis Capital target Wesfarmers’ Infinity sales

-CommBank ((CBA)) urges RBA to push back against Apple’s dominance in mobile payments applying new federal powers

-29Metals ((29M)) launches $150m equity raising after the share price rallies 182%

-Regulators probe big telcos after 4G switch left thousands unable to call emergency services

On the calendar today:

-UK Dec CPI

-US Sep/Oct Construction Spending

-BEACH ENERGY LIMITED ((BPT)) 2Q26 Activity Report

-EVOLUTION MINING LIMITED ((EVN)) 2Q26 Activity Report

-LYNAS RARE EARTHS LIMITED ((LYC)) Dec Qtr Activity

-PALADIN ENERGY LIMITED ((PDN)) Dec Qtr Activity

-RIO TINTO LIMITED ((RIO)) Dec Qtr Activity

-WESTGOLD RESOURCES LIMITED ((WGX)) Dec Qtr Activity

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

The Australian share market over the past thirty days…

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