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Stocks go up because the drop in commodity prices calms inflation fears

Image: Reuters Berita 24 English - On Friday, both stocks and bonds were on track for their first weekly gains in a month, as investors bet ...

Image: Reuters

Berita 24 English - On Friday, both stocks and bonds were on track for their first weekly gains in a month, as investors bet that central banks would bring inflation under control. However, worries about growth held commodities back.

Copper, which has many uses in industry and construction and is a good indicator of economic growth, fell 3% in Shanghai and is down more than 7% for the week. This is its biggest weekly drop since the financial markets crashed in March 2020 because of a pandemic.

Oil prices also dropped overnight, and Brent crude futures are down 2% on the week to $110.62 a barrel. Meanwhile, benchmark grain prices fell, with Chicago wheat down nearly 9% on the week to $9.42 a bushel, its lowest price since March. [O/R] [GRA/]

Since energy and food prices have been driving up prices, the price drops have helped the stock market. After some big losses in the past few weeks, the MSCI World equities index is up 2% this week.

MSCI's broadest index of Asia-Pacific stocks outside of Japan rose 1% on Friday. This was helped by short sellers getting out of Alibaba, which went up 5%, and signs that China's crackdown on technology is ending.

The Nikkei in Japan went up 0.8%, giving it a gain of 1.6% for the week. S&P 500 futures were flat after the index went up about 1% overnight. The U.S. dollar is hovering just below a level that hasn't been seen in 20 years.

"Recent drops in raw materials prices have been caused by market worries about a sudden slowdown," said NatWest markets strategist Brian Daingerfield. "However, lower commodity prices could be just what the doctor ordered for the world economy."

"So many of our worries about a hard landing have to do with how much things cost."

This week's soft data has been to blame.

In June, factory activity indicators in Japan, Britain, the euro zone, and the U.S. all went down. In the U.S., producers reported the first drop in new orders in two years because confidence was going down.

Bonds went up a lot because people thought that aggressive rate hikes would have to be slowed down. The German two-year yield went down 22 basis points, which was the biggest drop since 2008. [GVD/EUR]

Overnight, the yield on the 10-year Treasury note fell 7 bps and stayed at 3.0944 percent. [US/]

The U.S. dollar has fallen from its recent highs, but not too much because investors are still being careful. It was pretty stable at $1.0529 per euro and bought 134.79 yen at the last exchange. [FRX/]

This week, the weak yen has stabilised, and on Friday, it got a little boost from the fact that Japanese inflation topped the Bank of Japan's 2 percent target for the second month in a row. This puts more pressure on the Bank of Japan's ultra-loose policy stance.

Later in the day, everyone will pay close attention to speakers from the European Central Bank and the Federal Reserve, as well as British retail sales data and German business confidence. Aside from that, the main worry is how all of this will affect how well the company does.

"Second quarter earnings reports will send shockwaves through the market, even though the earnings outlook hasn't changed much so far," said Charu Chanana, a market strategist at Saxo in Singapore. "This will add to fears of a recession."

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