Stocks turn lower as investors assess policy outlook

European stocks and US stock futures fell Thursday and continued their declines as sentiment faltered after an upbeat start to the new month.

The Stoxx 600 slipped 0.2 percent, reversing earlier gains after the European regional gauge closed 1 percent lower on Wednesday. Contracts, which track Wall Street’s S&P 500, fell 0.8 percent after the broad index ended the previous session down 0.2 percent, a decline that was the sharpest two-day rise for U.S. stocks in more than a decade than two years braked.

Stocks have largely sold off this year, capping last week’s longest streak of quarterly losses since the 2008 financial crisis. As the US Federal Reserve and other central banks tighten monetary policy to curb inflation, the prospect of ever-higher borrowing costs has weighed on company valuations.

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At the same time, fears have intensified in recent months that the Fed and its peers will hike rates into a protracted slowdown and depress demand to the point of triggering a global recession — compounding the threat to corporate financial health.

Government bond markets came under renewed pressure during European morning trade, with the yield on the 10-year UK gilt rising 0.14 percentage point to 4.18% as its price fell. The gilt market was hit by a crisis last week when the new UK government’s ‘mini’ budget sparked fears about the amount of borrowing needed to fund large tax cuts.

Selling intensity eased last Wednesday as the Bank of England intervened to calm the turmoil – but trading has been volatile in the days since.

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The corresponding 10-year US yield, which is considered the global benchmark for the cost of borrowing, rose 0.02 percentage point to 3.78 percent.

New data on Thursday will give further clues to the state of unemployment in the world’s largest economy, with 203,000 initial jobless claims expected for the week ended October 1, up from 193,000 a week earlier. The Labor Department’s much-publicized monthly jobs report is due on Friday.

The heat in the jobs market is widely seen as a key influence on Fed decision-making, with signs of weakness raising hopes that the central bank will act with less force to contain inflation.

Market prices are currently reflecting expectations that the US main interest rate will peak at 4.5 percent in March 2023, compared to expectations of almost 4.7 percent at the end of September. The Fed’s current target range is 3 to 3.25 percent after three particularly large increases of 0.75 percentage points in a row.

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Various Fed officials were also scheduled to speak on Thursday. Your comments will be closely scrutinized for indications of the likelihood of a move towards a less assertive political strategy.

On the currency side, the dollar was up 0.4 percent against a basket of six peers after rising more than 1 percent in the previous session. The pound slipped 0.6 percent to hit $1.125 against the greenback, remaining around the level it was trading at before British Chancellor Kwasi Kwarteng unveiled his financial plans on September 23.

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