Stocks slide as US government shutdown looms, Trump targets Europe via Reuters

Written by Iain Withers and Stella Qiu

LONDON/SYDNEY (Reuters) – Global stocks edged lower on Friday ahead of the U.S. government shutdown, while European stocks opened higher after Donald Trump threatened tariffs if consumers in the region did not increase their purchases of U.S. oil and gas.

A key reading of US inflation later in the day could help shape investors’ expectations of when the Federal Reserve may target interest rates next year.

A Trump-sponsored spending bill failed in the US House of Representatives on Thursday as a majority of Republicans defied the president-elect, which investors said highlighted the growing power of political volatility.

Trump, who takes office as US president in January, has issued warnings to his country’s major trading partners to address their trade surpluses with the United States or face heavy obligations on their imports.

“I told the European Union that they have to pay their big bill to the United States for big purchases of our oil and gas,” Trump said in a Truth Social post on Friday.

“Otherwise, it’s TARIFFS all the way!!!,” he added.

Global stocks fell sharply on the day, with European stocks down 1%, set for a 3% drop this week, and US stock futures down 0.7-1.1%, indicating that Wall Street would open slowly.

“With Trump back in the mix there’s every chance we see (the political issues) going into the weekend, and maybe even a shutdown, so that’s going to be a big focus,” said Eren Osman, managing director of wealth management at Arbuthnot Latham.

“I wouldn’t go on holiday and leave any big bets open at the moment – there is definitely a trend towards positive market swings.”

The cost of buying insurance against a possible US default rose on Friday, reflecting investor concerns about the possibility of a government shutdown this weekend.

Credit default swaps (CDS), derivatives that ensure bondholders are paid if the issuer defaults, on six-month US debt rose to a four-week high of 11 basis points on Friday, up from 10 bps late on Thursday, according to data from IS&P Global Market Intelligence.

Trump’s proposed policies of tariffs, tax cuts and massive spending are part of the reason the Fed is cautious about easing policy next year. Markets now see less than two rate cuts next year.

The most watched inflation gauge in the US – Core Personal Expenditures – is due later on Friday. Forecasts are focused on a monthly increase of 0.2% in November, and any upward surprises could lead markets to increase bets for US policy easing next year.

That outlook has had a major impact on the Treasury market, where the 10-year average yield jumped above the key 4.5% level for the first time since May, and Treasuries are set for a fourth consecutive year of losses.[US/]

Capping a tumultuous year for rate decisions, central banks in Britain, Japan, Norway and Australia held tight, and Switzerland and Canada implemented 50-basis-point cuts at their final meetings of the year. Sweden’s Riksbank cut its policy rate by 25 bps, as did the European Central Bank last week.

The dollar ended the day on the boil, down 0.3% at 108.12, but remained close to a two-year high of 108.43. The euro gained 0.2% to $1.03925.

The dollar fell 0.4% against the yen to 156.87. The yen fell 1.7% overnight as the Bank of Japan held rates unchanged and Governor Kazuo Ueda warned that it would take time to assess the outlook for wages and the impact of Trump’s policies.

Friday’s data showed core inflation in Japan picked up in November, but swaps continued to lean against the BOJ’s January freeze, at 56%.

Oil prices fell on Friday, with US West Texas Intermediate down 0.6% to $68.96. Gold gained 0.5% on the day to $2,605 per ounce.