Stocks Fall, Bonds Rise As Investors Look For Safety

Wall Street equities fell and U.S. Treasuries rallied on Tuesday as investors grappled, a day before a likely Federal Reserve rate hike, with growing economic concerns after retail giant Walmart's profit warning and signs of a looming gas supply crisis in Europe.

The bid for safety also boosted the U.S. dollar after three sessions of declines and weighed on the euro.

European Union leaders agreed to ration gas usage after Russian's Gazprom said gas flows to Germany would fall from Wednesday to half of the current amount - already at just 40% of normal capacity.

U.S. equities fell with retail stocks after Walmart Inc slashed its profit forecast late Monday as surging prices for food and fuel spurred consumers to cut back on discretionary purchases. [.N]

Since Walmart is seen as a "litmus test for the health of the consumer", Carol M. Schleif, deputy chief investment officer at BMO Family Office, said investors are concerned about growth and feeling uncertain ahead of key economic data due out this week and the Fed's interest rate decision expected on Wednesday.

"This week is forcing investors to be very short term oriented. It's not allowing anybody to lift their eyes up even a week or a month," said Schleif. "It's an asset market, not just in stocks, that seems to suggest people think growth is questionable in the intermediate term."

Investors are expecting a 75 basis point Fed rate increase on Wednesday - with markets pricing about a 10% risk of a larger hike, as well as waiting to see whether economic warning signs prompt a shift in rhetoric.

"If they did 100 basis points it would probably surprise the market. There's that nervousness. If it's 75 as expected and the Fed says it's starting to see hints of slowing, the market might take that as a positive," said Schleif.

The Dow Jones Industrial Average fell 240.84 points, or 0.75%, to 31,749.2, the S&P 500 lost 51.75 points, or 1.30%, to 3,915.09 and the Nasdaq Composite dropped 237.52 points, or 2.02%, to 11,545.14.

The pan-European STOXX 600 index lost 0.03% and MSCI's gauge of stocks across the globe shed 1.02%.

Adding to Tuesday's gloom was the International Monetary Fund forecast for global real GDP growth of 3.2% in 2022, down from its 3.6% forecast issued in April, with downside risks from high inflation and the Ukraine war potentially pushing the world economy to the brink of recession.

The gap between yields on two- and 10-year Treasury notes widened on Tuesday after more than two weeks where the short-end yield has been higher than the long end - often a recession signal.

Benchmark 10-year notes last rose 9/32 in price to yield 2.7867%, from 2.82% late Monday. The 2-year note last fell 1/32 in price to yield 3.0426%, up from 3.035%.

Steven Ricchiuto, U.S. chief economist at Mizuho Securities USA LLC, noted that Europe's news was pushing the euro down and boosting the dollar as investors were feeling for safety.

"The U.S. macro conditions, the global macro conditions, could lead to an environment in which foreigners can look to grab to yield in the Treasury space," said Ricchiuto. "If you're going to be a global investor, where are you going to put your money?"

The dollar index rose 0.705%, with the euro down 0.98% to $1.012.

The Japanese yen strengthened 0.01% versus the greenback at 136.68 per dollar, while Sterling was last trading at $1.2025, down 0.14% on the day.

After rising earlier in the session, oil prices were in the red on weaker consumer confidence and the expectation that another 20 million barrels of crude oil would be released from the U.S Strategic Petroleum Reserve.

Prices were supported earlier in the session on news that Russia was tightening its gas squeeze on Europe.

U.S. crude fell 1.86% to $94.90 per barrel and Brent was at $104.22, down 0.88% on the day.

Spot gold dropped 0.1% to $1,717.37 an ounce as investors eyed economic uncertainties and waited on the Fed.

Bitcoin last fell 2.18% to $20,842.56.