LONDON/SYDNEY (Reuters) -Global stocks slid on Friday ahead of a possible U.S. government shutdown, while European shares came under fire after Donald Trump threatened to impose tariffs if consumers in the region did not increase their purchases of U.S. oil and gas.
A key read of U.S. inflation later in the day could also help shape investor expectations for where the Federal Reserve may steer interest rates next year.
A spending bill backed by Trump failed in the U.S. House of Representatives on Thursday as dozens of Republicans defied the president-elect, which investors said highlighted the increased potential for political volatility.
Trump, who assumes the U.S. presidency in January, has issued stark warnings to his country’s major trading partners to address their trade surpluses with the United States or be subject to hefty duties on their imports.
“I told the European Union that they must make up their tremendous deficit with the United States by the large scale purchase of our oil and gas,” Trump said in a post on Truth Social on Friday.
“Otherwise, it is TARIFFS all the way!!!,” he added.
Global stocks broadly fell on the day, with shares in Europe down 1%, set for a 3% drop this week, while U.S. stock futures fell 0.7-1.1%, indicating Wall Street was set to open lower.
“With Trump back in the mix there’s every chance we see that (political impasse) extend past the weekend, and possibly even a shutdown, so that will dominate the focus,” Eren Osman, managing director of wealth management at Arbuthnot Latham, said.
“I wouldn’t be going on holiday leaving any big open bets on right now – there’s definitely a propensity for some pretty wild swings in markets.”
The cost of buying insurance against a potential U.S. sovereign default rose on Friday, reflecting investor concern about the possibility of a government shutdown this weekend.
Credit default swaps (CDS), a derivative that ensures bondholders are paid if an issuer defaults, on six-month U.S. bills rose to a four-week high of 11 basis points on Friday, from 10 bps at Thursday’s close, according to data from S&P Global Market Intelligence.
Trump’s proposed policies of tariffs, tax cuts and big spending are part of the reason the Fed has turned cautious about policy easing next year. Markets now see fewer than two rate cuts next year.
A closely watched U.S. inflation gauge – the Core Personal Consumption Expenditures – is due later on Friday. Forecasts are centred on a monthly rise of 0.2% for November, and any upward surprises could lead markets to further scale back bets for U.S. policy easing next year.
That outlook has had a significant impact on the Treasury market, where the benchmark 10-year yields crossed above a key level of 4.5% for the first time since May, with Treasuries set for a fourth straight year of losses.[US/]
Wrapping an eventful year of rate decisions, central banks in Britain, Japan, Norway and Australia held firm, and Switzerland and Canada implemented cuts of 50 basis points at their last meetings of the year. Sweden’s Riksbank reduced its policy rate by 25 bps, as did the European Central Bank last week.
The dollar came off the boil on the day, down 0.3% at 108.12, but remained close to a two-year peak of 108.43. The euro gained 0.2% to $1.03925.
The dollar slipped 0.4% versus the yen to 156.87 . The yen had dived 1.7% overnight as Bank of Japan held rates steady and Governor Kazuo Ueda struck a dovish tone by saying it would take some time to assess the wage outlook and the impact of Trump’s policies.
Data on Friday showed Japan’s core inflation accelerated in November, but swaps continued to lean towards a pause from the BOJ in January, which is 56% priced in.
Oil prices fell on Friday, with U.S. West Texas Intermediate down 0.6% to $68.96. Gold gained 0.5% on the day to $2,605 per ounce.
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