With alliances in 'rupture', global markets could face higher volatility

The United States (US) and Canada had their last military conflict in 1812, when Canada was a British colony. The two nations have long had an open border and have fought on the same side several times. The last time the US was in a military conflict with Germany and Japan was in 1945; those nations have also been its allies since. The US dollar last saw a saddle point in 1971, when President Richard Nixon moved off the gold standard, thus establishing the dollar as the anchor global fiat currency. 

When alliances last this long, they are assumed to be permanent. But, as the famous saying goes, nations have no permanent friends or enemies, only permanent national interests. And Donald Trump has undermined these “permanencies”. 

Canada was said to be making contingency plans for possible US military action, following White House rhetoric calling for the country to become the “51st state” (of the US). Mr Trump’s stated intentions regarding Greenland have stretched the North Atlantic Treaty Organization (Nato) alliance to near breaking point. 

Let’s assume, however, that military action by the US against Canada or Greenland is off the table. Yet the economic conflict will almost certainly escalate. The European Union (EU), plus the UK, Japan, Canada and other US allies could be looking at a battle of tariffs and counter-tariffs. There are several other economic levers the EU and other trading partners could use. 

For example, the US has a large federal debt overhang, which is higher than its gross domestic product (GDP), at about $30 trillion. As much as $7-8 trillion of that debt is held by overseas entities. It also had a trade deficit of about $1 trillion in 2025 and needs to regularly auction new debt. If overseas entities just refuse to buy new debt, bond market yields will rise, with a negative impact on the US economy (and global markets). If overseas investors start selling the US debt they hold, it would spark a big spike in yields, with very painful fallout in the US. 

Right now, and in the last 50-odd years, the US hasn’t cared about big debt, including overseas debt, because it is in a unique position. It can just print currency (or make equivalent electronic entries) and hand over the paper to creditors, because the dollar is the world’s reserve currency. But that situation may not hold. 

Given the irrational and inconsistent American policy, attempts are being made to decouple global trade from the US and, consequently, from the dollar. Certainly, multinational companies everywhere are looking to rejig supply chains to have low or zero US dependencies. China is pushing for an alternative system to settle trade accounts in renminbi. Sanctioned nations like Iran may also have to go that route. India, too, could be considering such arrangements if the US threatens more tariffs and sanctions. 

More retaliatory measures from the EU could also be on the table. Some “extremists” like the French economist Gabriel Zucman have suggested targeting US billionaires with a wealth tax conditional on allowing America-based companies access to the EU. 

In a separate statement, the US economist Dean Baker has suggested even more extreme measures, such as the EU refusing to recognise US patents, copyright and intellectual property. Any such nuclear options would obviously walk the global economy into a further round of turmoil. But it could, according to the logic cited by Zucman and Baker, put pressure on the ultra-rich who donate to the Republican Party to seek regime change within the US. 

If any of this happens, Canadian Prime Minister Mark Carney’s viral assertion that this is a “rupture, not a transition” may come true. Whatever the eventual outcome of all these uncertainties, global markets appear to be headed for a period of higher volatility and disorderly behaviour. That is why gold, silver and platinum are in an extended bull run. 

Indian markets are well correlated with global sentiment, as India has a high exposure to global trade. Foreign portfolio investors (FPIs) sold over ₹1.6 trillion in equities in 2025, and India’s stock-market valuations have stayed afloat only because of retail flows into domestic mutual funds. In part due to FPI selling, the rupee has underperformed the dollar, which has itself underperformed against other hard currencies since Mr Trump took charge. If FPI selling accelerates and global markets fall further, domestic inflows may not be enough to prevent a big bear market. Traders might welcome that, and investors should be prepared for the scenario.