Wall Street stocks surge for second day as rally continues

US stocks rose more than 2 per cent for a second straight session, with weak economic data helping ease some worries about the pace of additional interest rate increases from the Federal Reserve.

The S&P 500 index added 3.1 per cent on Tuesday, having closed 2.6 per cent higher on Monday. The technology-heavy Nasdaq Composite rose 3.3 per cent.

The cumulative 5.7 per cent gain this week marks the S&P 500’s biggest two-day rally since March 2020. The back-to-back increases were also the first time since March 2022 that the index has notched consecutive sessions each with a gain of more than 2 per cent, according to Financial Times analysis of Refinitiv data.

The rally comes after three straight quarters of declines for the S&P 500 — the longest quarterly losing streak since 2008 — as the Fed has led the charge on raising interest rates aggressively to curb stubbornly high inflation. Higher borrowing costs and fears of the central bank inducing a recession with tighter monetary policy have weighed heavily on share prices.

But with the S&P 500 down 21 per cent this year, some analysts and investors are pointing to opportunities to buy stocks on the cheap.

“We turn tactically bullish equities for a [fourth-quarter] sharp rally,” analysts at Cantor Fitzgerald said this week. “We believe that inflation is falling sharply as we speak and will soon be recognised by the Fed.”

Employment data from the Bureau of Labor Statistics also provided some encouragement to investors on Tuesday that the Fed might slow its interest rate rises. The number of job openings in the US dropped in August to 10.1mn, below economists’ expectations of 10.8mn and the previous figure of 11.2mn.

Markets were on Tuesday pricing in expectations of US interest rates reaching just under 4.5 per cent by March 2023, down from estimates of almost 4.7 per cent in late September. The Fed’s current target range stands at 3 to 3.25 per cent, after three straight interest rate increases of 0.75 percentage points.

A manufacturing index released on Monday showing activity in the US factory sector shrank at its fastest pace since May 2020 has also helped at least temporarily ease fears about rate increases.

But many analysts warned the rally may not be sustainable. “It’s not rare to see some rebound within a bear market,” said Mabrouk Chetouane, head of global market strategy at Natixis Investment Managers.

“We don’t have enough data to feed the scenario of a pivot from central banks,” he said, adding that upcoming data releases on US unemployment and services activity will provide further clues.

“With sentiment toward equities already very weak, periodic rebounds are to be expected,” said Mark Haefele, chief investment officer at UBS global wealth management. “But markets are likely to stay volatile in the near term, driven primarily by expectations around inflation and policy rates.”

Haefele added that some of last week’s selling pressure may have stemmed from quarter-end rebalancing of portfolios.

Elsewhere, Europe’s regional Stoxx 600 closed up more than 3 per cent.

Government bond prices ticked higher on Tuesday, following gains in the previous session, with the yield on the 10-year US Treasury note slipping 0.01 percentage points to 3.63 per cent. The two-year yield, which is more sensitive to changes in interest rate expectations, was fractionally lower at 4.10 per cent.

UK gilts rallied more sharply, with the 10-year yield falling 0.08 percentage points to 3.86 per cent. The gilt market was last week gripped by volatility, after Westminster’s proposed tax cuts and extensive borrowing plans spooked investors and sparked a historic sell-off in long-dated debt.

The selling eased last Wednesday when the Bank of England intervened to soothe the turmoil, with sentiment improving further on Monday after Liz Truss’s government was forced into a U-turn over the planned tax cuts for higher earners.

The pound advanced 1.2 per cent on Tuesday to $1.14 against the dollar, back to levels last seen before chancellor Kwasi Kwarteng unveiled his “mini” Budget 11 days ago.