Metals are regaining their luster, a sign the global economy is becoming more resilient, helping to boost stocks and currencies of commodity-producing nations.

Iron ore surged by the daily limit of 6 percent on the Dalian Commodity Exchange and rising steel prices in China spurred a rally from aluminum to zinc. Currencies of resource-exporting nations, South Africa and Australia, led gains versus the dollar. The Stoxx Europe 600 Index headed for its strongest close in three weeks as earnings reports fueled optimism about the profitability of the region’s companies. Spanish and Italian bonds outperformed top-rated German bunds as the region’s improving political and economic outlook sapped demand for haven assets.

Industrial metals have gained steadily this year with an index of London Metal Exchange contracts poised for the first annual increase since 2012 as a pickup in manufacturing in the U.S. and euro area point to an economy that’s getting more robust. A report Tuesday showing German business sentiment rose to the highest level in more than two years in October added to the sense of optimism. Caterpillar Inc. is among companies scheduled to release earnings that may provide more insight on the sustainability of the recovery in energy and mining. Apple Inc. is due to announce earnings after markets close Tuesday.

“We’ve had a whole host of better-than-expected manufacturing data,” said Ole Hansen, the head of commodity strategy at Saxo Bank A/S in Hellerup, a Copenhagen suburb. “Strong gains in China, led by steel and iron ore, are supporting the sentiment, which in turn has attracted increased speculative trading across the metals space.”

David Fuller's view

I think there are several key factors here.  1) Commodity producers are finally wising up and recalling that supply is the most important variable in the price structure, even for industrial resources.  Supply can change quickly, either due to accidents or wars in producer regions but the most significant change is producer cutbacks, preferably publicised.  Producers have gradually increased cutbacks in the production of metals this year. 

2) A number of metal producers had hedged future production but have been reducing this strategy on a gradual basis in 2016, as prices had become too low.  Speculators had shorted metal futures but have been unwinding or even reversing this strategy as downward price momentum has given way to recoveries.

3) Demand eventually and inevitably increases at very low prices – ‘the cure for low prices is low prices’.  Additionally, increasing talk of fiscal spending, including plans for implementation, is causing investors to reassess their hypothesis for continued low growth and deflation.  They have gradually reinvested in industrial resources this year. 

These weekly 10-year charts for Aluminium, Copper, Lead, Nickel, Tin and Zinc are all in various stages of cyclical recovery.  

Copper, shows the least relative strength in this sector.  It is ranging within a symmetrical triangle and needs to break its progression of lower rally highs within this year’s range to indicate that demand is gaining the upper hand. Aluminium and Nickel are also lagging due to insufficient supply cutbacks to date. However, the clear relative strength of Tin, Lead and Zinc shows what can be achieved if / when producers cooperate in unison.