European shares and US stock futures turned lower on Wednesday, putting the brakes on a strong rally fuelled by investors scooping up shares on the cheap and weak economic data easing fears over interest rate rises.
The regional Stoxx 600 slipped 0.7 per cent in morning trading, having closed 3.1 per cent higher on Tuesday. Futures contracts tracking Wall Street’s benchmark S&P 500 fell 0.8 per cent after the broad gauge also ended the previous session up 3.1 per cent.
Tuesday’s moves took the S&P 500’s advance over two days to 5.7 per cent — its strongest such rally since the depths of the coronavirus pandemic in April 2020 — as some analysts and investors identified bargain opportunities after three straight quarters of losses.
The gains had picked up on Tuesday following the release of weaker than expected US labour market data that showed the number of job openings in the world’s largest economy dropped in August to 10.1mn, below economists’ forecasts of 10.8mn and the previous month’s figure of 11.2mn.
Jobs reports have been closely watched as an indicator of how far and fast the US Federal Reserve will tighten monetary policy to curb inflation, with stronger data driving expectations of more aggressive action and weaker numbers soothing concerns over the scale of future rate rises.
The fall reflected in Tuesday’s data marked the biggest drop in job openings since April 2020, said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “This is the first official indicator to point unambiguously, if not necessarily reliably, to a clear slowing in [labour] demand.”
Concerns have intensified in recent months that the Fed and its peers will jack up borrowing costs to such an extent that they compound an economic slowdown.
But even as signs of a cooling jobs market eased expectations of rate increases, Hani Redha, global multi-asset portfolio manager at PineBridge Investments, warned: “The scale of tightening means we will see ongoing deceleration that is quite likely to take us into a recession anyway.”
Redha said equity market gains in the past couple of days could be a “bear market rally”, when shares recover briefly during a longer period of decline. “As a bear market progresses, the rallies get bigger,” he added. “It takes more and more volatility to . . . wash out the long positions [before a more sustainable recovery begins]”.
The dollar, which has slipped back in recent days as US borrowing cost expectations have eased and stock markets rallied, added 0.6 per cent against a basket of six currencies. Strategists at ING said they “remain sceptical that the Fed is about to pivot on the back of slightly softer US data this week”.
Government bond prices also declined on Wednesday after days of gains. The 10-year UK yield added 0.1 percentage points to 3.97 per cent, while the policy-sensitive two-year yield rose 0.11 percentage points to 4 per cent.
The gilt market had convulsed last week in response to Westminster’s “mini” budget as investors took fright from the new chancellor’s proposed tax cuts and extensive borrowing plans.
Selling pressures eased on Wednesday last week when the Bank of England intervened to calm the turbulence.
Sterling lost 1 per cent to trade at $1.136 against the dollar, but remained around levels last seen before UK chancellor Kwasi Kwarteng unveiled the government’s fiscal plans on September 23.
Treasury yields also moved higher on Wednesday as the US debt instruments’ prices fell, with the 10-year benchmark yield rising 0.07 percentage points to 3.69 per cent.
Asian stocks followed US equities higher on Wednesday morning, with the Hang Seng index closing up 5.9 per cent as it reopened after a public holiday. Elsewhere, Japan’s Topix rose 0.3 per cent.