Wall Street is once again banking on the TACO trade because they’ve been ‘burned’ by believing Trump before

Investors are trying to remain level-headed as tensions between the U.S. and Europe escalate, with many drawing on experience from Liberation Day as a tool for how to navigate current geopolitical volatility.

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

At the time of writing, the VIX volatility index is up 27% over the past five days, its highest since April last year when the Oval Office announced sweeping tariffs on every nation on the planet. While markets in the U.S. are yet to have the opportunity to react to the news after being closed for the Martin Luther King holiday, assets in Europe are looking pale.

Germany’s DAX is down 1.57% at the time of writing, London’s FTSE is down 1.4% and France’s CAC 40 is down 1.2%. Asia is similarly queasy, Tokyo’s Nikkei 225 is down 1.11% while Hong Kong’s Hang Seng Index is down 0.29%. A preview for U.S. trading comes in the form of futures, with the S&P 500 trending down 1.75% at the time of writing.

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

However, the damage could have been worse: investors don’t even need to cast their minds back a year for inspiration. Markets plummeted following Trump’s Rose Garden address on April 2, his so-called Liberation Day, despite the fact many of his threatened tariffs were delayed within a matter of days. And so the ‘TACO’ trade was born: Trump Always Chickens Out.

Jim Reid of Deutsche Bank noted to clients this morning that there’s “room for bigger moves” in markets, and highlighted that Trump’s duties imposition on key trading partners is already on shaky ground. This is on account of an imminent Supreme Court ruling on whether the White House’s initial round of tariffs were 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 escalation with China in October prompted a -2.71% decline for the S&P 500 on that day, before he then met with Xi and the trade truce was extended by a year.”

Over at 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 in the wake of Trump’s latest tariff threats. The implications of additional tariffs are more U.S. inflation pressures and a further erosion of the USD’s status as a reserve currency. So far, bond investors do not seem to be taking the threats too seriously.”

Markets also “dismissed” another barb from Trump aimed at French President Macron, over duties levied on champagne and Bordeaux if the European leader refuses to cough up $1 billion to join the Board of Peace for Gaza.

Unconvinced traders

Further evidence of TACO traders comes from Polymarket. At the time of writing, only 17% of betters believe all the tariffs Trump has threatened against Europe will go into effect on February 1. A further minority of 40% believe any tariffs will go into effect in a fortnight’s time.

Odds are also declining on a country-to-country basis. For example, Denmark leads Polymarket’s polls as the most likely country to face levies from the U.S., but that still sits as the outlying outcome at 40% and decreasing. Meanwhile France’s odds of tariffs are at 38%, and Norway is at 37%.

Potentially buoying the idea that the president will make another U-turn is political polling, especially with midterm elections approaching in November. Trump’s approval ratings have been declining across a number of outlets, with nine in 10 Americans telling a Quinnipiac survey they were against taking Greenland using military force. A further Reuters/Ipsos poll found just 17% of voters support Trump’s efforts to acquire Greenland.

However, if investors—or foreign governments—rely too heavily on the notion that Trump will chicken out, they could shoot themselves in the foot. After all, if the White House sees markets behaving in a fairly stable manner, then this could give him the confidence to push ahead with the very plans that investors were betting against. As Deutsche Bank’s Henry Allen 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.”

This story was originally featured on Fortune.com