Credit Fears Weigh on US Stocks, Lift Bonds

U.S. and European stocks fell on Tuesday while government bond prices rose.

U.S. and European stocks fell on Tuesday while government bond prices rose as investors fearing the next headline on spreading credit market turmoil exited risky trades.

Global investors also demanded more of a premium for holding corporate bonds and emerging market debt in the current risk-averse environment, and the dollar rose to a six-week high versus the euro, gaining from safe-haven flows.

Early losses in U.S. shares weighed on European stocks after disappointing results from giant retailers Wal-Mart Stores and Home Depot, whose shares fell sharply.

Financial stocks declined on further unraveling in the credit sector. Trustees for two Canadian trusts said they were unable to issue new securities to repay maturing commercial paper.

"It's definitely going to make people feel even less comfortable about the market," said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles. "Not only the credit market, but it's potential impact on the equity market."

Benchmark U.S. stock indexes were down. The Dow Jones industrial average .DJI> fell 91.88 points, or 0.69 percent, at 13,235.59. The Standard & Poor's 500 Index .SPX> was down 10.08 points, or 0.72 percent, at 1,441.89. The Nasdaq Composite Index .IXIC> lost 13.32 points, or 0.52 percent, at 2,521.94.

U.S. government bond prices erased earlier losses to trade up despite early inflation data showing producer prices had risen more than expected in July.

The benchmark 10-year U.S. Treasury note US10YT=RR was up 7/32, its at 4.7361 percent. The 2-year U.S. Treasury note US2YT=RR added 1/32 to yield 4.3969 percent. The 30-year U.S. Treasury bond US30YT=RR was up 9/32, yielding 4.9843 percent.

Credit worries overshadowed data showing euro zone growth slowed more sharply than expected in the second quarter, to 0.3 percent, below the 0.6 percent rate economists had expected and well below the first quarter's 0.7 percent.

In currency trading, the dollar was up against a basket of major currencies, with the U.S. Dollar Index .DXY> up 0.33 percent at 81.318 from a previous session close of 81.048.

The euro EUR=> fell 0.24 percent to $1.3577 due to concerns over European exposure to problematic U.S. credit markets. Against the Japanese yen, the dollar JPY=> was down 0.31 percent at 117.86 from a previous session close of 118.23.

Sterling dipped below the $2.00 level after British July inflation came in below the Bank of England's 2 percent target rate for the first time in over a year.

Concerns over tightening credit conditions were pervasive internationally. Switzerland's UBS, the world's largest wealth manager, warned of continued credit market upheaval, while Spanish daily ABC reported on a $2.2 billion exposure of Santander to risky U.S. credit sectors.

Gold XAU=> prices fell due to the rallying dollar and lower-than-usual gold sales by the European Central Bank. But uncertainty in the credit markets and shaky equities lent the precious metals market a degree of support.

Earlier in the global trading day, Tokyo stocks .N225> edged up 0.3 percent as trading firms such as Itochu Corp. and other energy-related stocks lured buyers looking for cheap valuations and solid profit prospects after recent falls.

Asian stocks outside Japan .MIAPJ0000PUS fell 0.7 percent. MSCI'S emerging market equity index .MSCIEF> was down 1.1 percent.