U.S. employers cut far more jobs than expected last month and the unemployment rate hit 9.5 percent, the highest in nearly 26 years.

While analysts caution that jobs data is a lagging indicator and unemployment can still rise when the economy is turning around, it was enough to prompt investors to reduce their risk assets especially before a long weekend in the United States.

Furthermore, signs of a recovery in the euro zone’s dominant service sector took a backwards step in June with the final services purchasing manager index coming in at 44.7 in June, down from May’s seven-month high of 44.8.

This marks the thirteenth consecutive month the index has been below the 50.0 mark that divides growth from contraction.

“Payrolls were a wake up call,” said Jacques Henry, analyst at Louis Capital Markets, in Paris.

“The data showed that the economic recovery remains fragile and more downbeat data is to be expected, particularly on the jobs front. Stocks are ripe for a consolidation period.” MSCI world equity index fell 0.2 percent on the day, having hit the 1-1/2 week low earlier.

The pullback comes after the MSCI world equity index rose more than 21 percent in the second quarter, its biggest ever quarterly gain in its 21-year history.

“The equity rally hasn’t ended, but it is moving into a new phase. We’re moving from a period of very cheap equities and extreme risk aversion into one where equities are more fairly valued,” Bill O’Neill, portfolio strategist at Merrill Lynch Global Wealth Management, said in a note to clients.

“Future advances will be driven by earnings upgrades, rather than the recovery of investor demand that we have seen over the past few months.”

The FTSEurofirst 300 index was down 0.4 percent, led by mining shares. while emerging stocks were steady on the day.

U.S. markets are closed for a holiday on Friday.

U.S. crude oil fell 0.3 percent to $66.53 a barrel.

After the employment report, U.S. short-term interest rate futures jumped, trimming chances of rate hikes from the Federal Reserve this year.

“The BLS (Bureau of Labour Statistics) sprayed weed killer on our green shoots,” RBS said in a note to clients.

“Weaker-than-expected payrolls were a dose of grim reality for financial markets and expectations of US rate hikes and general optimism in markets can correct further.”

The September bund futures fell 11 ticks.

The dollar rose a quarter percent against a basket of major currencies while the euro rose 0.4 percent to $1.3997 .

LONDON, July 3 (Reuters)