Metals jump on economic optimism as rand strengthens with miners

Bloomberg.- 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. Austrian and U.K. government bonds were weighed down by new supply.

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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. Better-than-expected earnings from General Motors Inc. and a cut in its sales forecast from Caterpillar Inc. indicated that the outlook for global growth remains uncertain. 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.”

Commodities

After three years of slumping prices as mine supply rose and Chinese growth slowed, iron ore has gained 36 percent in 2016. China steelmakers, which produce half the world’s output, have fired up plants after stronger demand boosted prices and expanded profit margins.

Zinc, used to galvanize steel, jumped 2.7 percent at 7:49 a.m. in New York, after surging to a five-year high on the Shanghai Futures Exchange, while hot rolled steel coil climbed to levels last seen in April. Coking coal, necessary for steel production, rallied to an all-time high on tight supplies. Aluminum, copper and nickel all gained at least 2 percent on the LME.

Crude oil rose 0.5 percent to $50.76 a barrel in New York, having declined 0.7 percent on Monday after Iraq said it should be exempted from planned production cuts being orchestrated by the Organization of Petroleum Exporting Countries. The head of OPEC is set to visit Baghdad on Tuesday for talks aimed at resolving the matter.

Stocks

The Stoxx 600 rose 0.1 percent, with miners leading gains. Orange SA gained 1.6 percent after posting an increase in quarterly profit.

Randstad Holding NV rose 1.2 percent after announcing better-than-estimated revenue and saying growth trends were resilient across regions. Luxottica Group SpA jumped 7.7 percent after the maker of Ray-Ban sunglasses said sales growth will accelerate in 2017.

Banca Monte dei Paschi di Siena SpA swung between gains of as much as 27 percent and a loss of 23 percent, after Chief Executive Officer Marco Morelli pledged to begin talks with investors to help raise capital as he seeks to return the ailing lender to profit.

S&P 500 Index futures were little changed. U.S. equities added 0.5 percent on Monday as deal activity boosted sentiment.

Merck & Co. gained 1.2 in early trading in New York after third-quarter profit topped analysts’ estimates, helped by better-than expected sales of the vaccine Gardasil and the antibiotic Cubicin. Procter & Gamble Co., the world’s largest consumer-products company, advanced 2.4 percent as it posted first-quarter profit that topped analysts’ estimates. General Motors Co. climbed 2 percent while Caterpillar fell 2.4 percent.

Currencies

South Africa’s rand rose 0.7 percent, followed by a 0.3 percent gain for the Australian dollar amid a pickup in commodities prices. They were among the few to advance versus the greenback, which is being supported by speculation that the economy is strong enough for the Federal Reserve to increase interest rates.

The Bloomberg Dollar Spot Index held near its highest level since March as fed fund futures prices Monday indicated there’s a 71 percent chance of a rate increase this year, up from 68 percent last week. The gauge gained in the last session as Fed Bank of Chicago President Charles Evans said it’s likely that interest rates will be hiked three times by the end of 2017.

Canada’s dollar weakened 0.2 percent, erasing most of the last session’s rebound from a seven-month low, after central bank Governor Stephen Poloz clarified earlier remarks that had curbed speculation interest rates will be cut. Poloz said he wasn’t referring to monetary policy when he told lawmakers that the best plan was “to wait for the next 18 months or so.”

The yuan held near a six-year low in Shanghai and reached its weakest level on record in the offshore market, which began trading in 2010. The onshore exchange rate declined in all but one of this month’s 11 trading sessions through Monday, a sign the central bank has reduced support since the currency’s inclusion in the International Monetary Fund’s Special Drawing Rights on Oct. 1.

Bonds

Austria’s 2062 bonds, the nation’s longest-dated outstanding debt, declined for a third day, with the yield rising one basis point to 1.19 percent.

The country was said to be selling securities maturing in 2086, expanding the exclusive club of European nations that have sold debt due in more than 50 years.

The yield on 2068 gilts rose three basis points to 1.58 percent, with Britain selling bonds maturing in 2065 via banks.

Yields on Treasuries due in a decade were one basis point higher at 1.78 percent, after climbing three basis points on Monday.

U.S. yields will have to rise if Evans proves to be correct in his rates predictions for 2017, according to Kim Youngsung, head of overseas investment at South Korea’s Government Employees Pension Service in Seoul.

After one increase “for sure” in December, two more in 2017 will send the 10-year yield past 2.5 percent, Kim said. Economists predict the benchmark will end next year at 2.14 percent, according to a Bloomberg survey with the most recent forecasts given the heaviest weightings.

Japan’s 20-year government bonds rose for a fourth day after demand picked up at an auction of the securities on Tuesday. The yield fell 1/2 a basis point to 0.37 percent, matching its lowest level of the past three weeks.

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