(Bloomberg) -- For weeks, the talk on Wall Street was how markets have been unusually subdued at the start of the year. But with a clash over Greenland throwing the European and American alliance in disarray and Japanese bonds plunging, the calm is breaking.

US traders are set to face a wave of selling when they get back to their desks after a long weekend. S&P 500 futures point to a 1.7% drop that would erase the gains so far this year. Treasuries, the dollar and Bitcoin are already sliding. The VIX Index, a measure of expected stock-market swings, topped 20 for the first time since November.

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The scale of the moves suggests that investors’ willingness to shrug off earlier shocks — including the White House’s capture of Venezuela’s leader and its renewed attacks on the Federal Reserve — is beginning to erode.

At the center of the anxiety a year since he returned to office is President Donald Trump and his push for control over Greenland, stoking investor anxieties on worst-case scenarios ranging from a rupture in the NATO alliance to another full-blown trade war.

“Our bet is that in the base case the severity will ultimately still be contained as investors bet on some version of a compromise,” wrote Krishna Guha, head of central bank strategy at Evercore ISI. “But the impacts would be very severe if this goes off the rails, and there will be long-lasting implications, including for the dollar.”

As of last week, the average volatility across US bonds, equities and the dollar over the past month had sunk to the lowest since at least 1990.

But with the news coming at a rapid clip, it’s little wonder that investors have rushed to the sidelines. The Supreme Court is expected to rule on Trump’s tariff program soon. Treasury Secretary Scott Bessent said Trump could also announce his pick to run the Federal Reserve as soon as next week.

Japan’s soaring bond yields are also heightening investor worries. Yields on the nation’s 40-year debt topped 4% and the rate on 10-year Treasuries jumped six basis points to 4.29%.

The widespread view among investors is that the US and Europe will reach a diplomatic solution on Greenland. But the chaotic style of White House negotiations, with Trump adding French champagne to his list of tariff threats, is putting a chill on market confidence.

“The latest step-up in transatlantic tensions and tariff uncertainty dents the near-term investment case for European equities,” wrote Citigroup Inc. strategist Beata Manthey in a note. She cut her view on the region’s stock for the first time in over a year.

Investors have lately been resilient to any geopolitical frictions, with stocks continuing to climb in early January. In Bank of America Corp.’s latest survey, investors were the most bullish since July 2021 and reported record low cash levels.

The bank said its Bull and Bear indicator reached “hyper-bull,” an indication that investors need to load up on risk hedges and safe havens. Instead, nearly half of participants said they do not have protection against a sharp fall in equity prices, the highest level since 2018.

At Jefferies, strategist Mohit Kumar speculated that a deal will eventually be struck that allows Greenland to keep sovereignty, but grants the US more military access. But in the meantime, an agreement could take months, and markets will likely face heightened volatility.

“Beneficiaries of the rise in geopolitical tensions would be defense stocks, financials and gold, and we are long these in our portfolio,” he wrote.

At La Financière de l’Échiquier, Alexis Bienvenu echoed that sense of concern.

“There is a bit of fear in the market of how far he can go on new types of threats,” the portfolio manager said. “We know that in many cases Trump has threatened companies and countries with very high tariffs, but at the end he engages in negotiations and he makes things appear a bit smoother.”

--With assistance from Sagarika Jaisinghani.

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