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By Iain Withers and Stella Qiu
LONDON/SYDNEY (Reuters) – Global stocks fell on Friday ahead of the U.S. government shutdown, while European shares were on 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 U.S. inflation reading later in the day could also help improve business expectations of where the Federal Reserve will raise interest rates next year.
A Trump-backed spending bill failed in the US House of Representatives on Thursday as many Republicans lashed out at the president-elect, which traders said reflected growing political instability.
Trump, who will take over the US presidency in January, has strongly warned his country’s big businesses to end their trade gains with the United States or face a major job in their trade.
“I told the European Union that they should make up their huge deficit with the United States by buying our oil and gas,” Trump said in a tweet on Truth Social on Friday.
“Otherwise, it’s TARIFFS all the way!!!,” he added.
Global stocks fell sharply on the day, with shares in Europe falling 1.7%, after falling 3.5% this week, while US futures fell 0.8-1.3%, indicating that Wall Street opened.
Adding to the gloom was Danish drug giant Novo Nordisk (NYSE:), which said its next-generation obesity drug was less effective than expected, wiping $125 billion off its market value.
“With Trump back in the mix there’s every chance we see (the political crisis) continuing into the weekend, and possibly a shutdown, so that’s going to be a focus,” said Eren Osman, managing director of wealth management at Arbuthnot Latham.
“I’m not going on holiday and giving up on any big bets right now – there’s a tendency to change dramatically in the markets.”
The cost of buying insurance against potential U.S. defaults rose on Friday, reflecting investor concern over a possible government shutdown this week.
Credit default swaps (CDS), a derivative that ensures bonds will be paid if the issuer defaults, on six-month US debt rose to a four-month high of 11 basis points on Friday, from 10 bps late on Thursday, according to data from the US . S&P Global Market Intelligence.
Trump’s views on interest rates, tax cuts and more spending are among the reasons why the Fed has been cautious about rate cuts next year. Markets are now seeing a rate cut of less than two times next year.
The closely watched measure of US inflation – Core Personal Expenditures – is due on Friday. Forecasts are pegged at a monthly rise of 0.2% in November, and any surprises could prompt markets to upgrade their bets on US policy next year.
That sentiment has had a major impact on the Treasury market, with the 10-year yield crossing the key 4.5% level for the first time since May, when the Treasury yield was set for the fourth straight year. (US/)
Ending a year full of rate decisions, central banks in Britain, Japan, Norway and Australia held steady, and Switzerland and Canada cut 50 basis points at their year-end meetings. Sweden’s Riksbank cut rates by 25 bps, as did the European Central Bank last week.
The dollar came off the boil on the day, down 0.3% at 108.13, but remained close to its two-year high of 108.43. The euro gained 0.3% to $1.0392.
The dollar fell 0.4% against the yen to 156.73. The yen fell 1.7% overnight as the Bank of Japan kept rates steady and Governor Kazuo Ueda expressed interest in saying it would take time to assess the balance of payments and the impact of Trump’s policies.
Data on Friday showed Japan’s inflation rate rose in November, but the exchange continued to pause from the BOJ in January, which is 56% of the rate.
Oil prices fell on Friday, with US West Texas Intermediate down 1.2% to $68.55. Gold gained 0.4% on the day to $2,605 an ounce.
