Deutsche Bank's Thoughts On Greenland: Europe Owns $8 Trillion Of US Bonds And Equities

This weekend President Trump renewed trade threats on Europe with the aim of acquiring Greenland. And while the euro dipped in early trade, DB's chief FX strategist George Saravelos is not so sure the impact on the euro will be as negative as is commonly assumed. He explains why in a note posted earlier on Sunday (and available to pro subs).

We excerpt the highlights from the note below:

Europe owns Greenland, it also owns a lot of Treasuries. Saravelos spent most of last year arguing that for all its military and economic strength, the US has one key weakness: it relies on others to pay its bills via large external deficits. Europe, on the other hand, is America's largest lender: European countries own $8 trillion of US bonds and equities, almost twice as much as the rest of the world combined.

In an environment where the geoeconomic stability of the western alliance is being disrupted existentially, it is not clear why Europeans would be as willing to play this part. Danish  pension funds were one of the first to repatriate money and reduce their dollar exposure this time last year. With USD exposure still very elevated across Europe, developments over the last few days have potential to further encourage dollar rebalancing.

Remember the Munich Security Conference. It was the US Vice President's Munich speech last year that proved the proxy catalyst for an acceleration in European defence spending. Could it be Greenland this year that catalyses an acceleration in European political cohesion?

It is notable that the two leaders of the euro-sceptic far-right parties in Germany and France have been highly critical of recent developments. The extent to which a unified European strategy arises over the next few days to address US pressure will be a key near-term signal. Either way, Saravelos has sympathy with longer-term arguments that the US approach may be increasing the prospects of longer-term European political cohesion.

Putting the two together, the German FX strategist is not convinced any negative EUR/USD reaction will be sustained this week. He is also not convinced of any impact on EUR/DKK (see DB's extensive report on the Danish krone here).

Beyond FX, it is reasonable to assume that the EU thinks it holds some leverage given the upcoming US midterms. The administration is focused on bringing inflation and treasury yields down and Europe may be able to influence both.

From DB's perspective the key thing to watch over the next few days will be whether the EU decides to activate its anti-coercion instrument by putting measures that impact capital markets on the table.

As the German strategist concludes, with the US net international investment position at record negative extremes, the mutual inter-dependence of European-US financial markets has never been higher. It is a weaponization of capital rather than trade flows that would by far be the most disruptive to markets.

More in the full note available to pro subs.