European shares and US stock futures snap strong rally

European equities 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 0.4 per cent in early dealings, having closed 3.1 per cent higher on Tuesday. Contracts tracking Wall Street’s benchmark S&P 500 fell 0.6 per cent, after the broad gauge also ended the previous session up 3.1 per cent.

That move for the S&P took the broad gauge’s gains 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 rally 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.”

Government bond prices declined on Wednesday after days of gains. The 10-year UK yield added 0.08 percentage points to 3.95 per cent, while the policy-sensitive two-year yield rose 0.13 percentage points to 4.04 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 last Wednesday when the Bank of England intervened to calm the turbulence.

Treasury yields also moved higher on Wednesday as the US debt instruments’ prices fell, with the 10-year benchmark yield rising 0.06 percentage points to 3.68 per cent.

The dollar, which has slipped back in recent days as US borrowing cost expectations have eased and stock markets rallied, added 0.4 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”.

Sterling lost 0.5 per cent to $1.142 against the dollar to return to trading levels before Kwasi Kwarteng unveiled the government’s fiscal plans.

Asian stocks followed US equities higher on Wednesday morning, with the Hang Seng index jumping more than 6 per cent as it reopened after a public holiday. Elsewhere, Japan’s Topix rose 0.3 per cent.