Biggest Mining Rally Since 2008 Propelled by Gloomier Economy

  • Base metals wipe out this year's losses as dollar weakens
  • U.S. services sector grew at slowest pace in nearly two years

Thank a gloomier-than-expected U.S. economic outlook for the biggest rebound in mining stocks since the global financial crisis.

Pummeled in the past year amid faltering Chinese demand and the prospect of higher interest rates, mining stocks are now surging the most in seven years. Freeport-McMoran Inc. and Anglo American Plc paced gains among major producers, with the Bloomberg World Mining Index’s combined market value swelling by $44 billion in the past two days.

Behind the rally is a sliding dollar amid speculation that global growth may not be strong enough to warrant further central-bank tightening. That makes commodities cheaper in other currencies, boosts the appeal of haven investments such as gold and signals lower credit costs for producers.

“It’s a perceived U.S. dollar weakness that is driving all this,” Hunter Hillcoat, an analyst at Investec Plc, said by telephone. “The response has been staggering and we feel it has been exaggerated by the thinness of the equity market.”

The dollar’s retreat was sparked by data showing the U.S. services sector grew at the slowest pace in nearly two years, underscoring the vulnerability of the American economy to unsteadiness abroad. The report tipped the fixed-income market’s balance closer toward zero rate hikes by the Federal Reserve this year, amid prospects central banks from Asia to Europe will act to quell the turmoil that’s roiled markets in 2016.

China Boost

Adding further fuel is China, the world’s biggest metals user. The government there set a range for its growth target for the first time in two decades, saying the economy would expand 6.5 percent to 7 percent this year.

“That growth target would be extremely bullish for industrial metal prices,” Michael Smith, the president of T&K Futures and Options Inc. in Port St. Lucie, Florida, said in a telephone interview. “It should spur demand and gobble up some of the excess supplies that we have.”

Freeport surged as much as 24 percent to lead the Standard & Poor’s 500 Index, and headed for its biggest two-day tear on record. Anglo American jumped 20 percent while BHP Billiton Ltd., the world’s top miner, advanced 8.3 percent.

Vale SA, the top iron-ore producer, rose as much as 15 percent in Sao Paulo, the biggest intraday gain since 1999. A price index of the steelmaking ingredient gained 2 percent.

The Bloomberg Industrial Metals sub-index advanced 1.2 percent at 2:15 p.m. in New York, taking this year’s gain to 0.9 percent, as copper, aluminum, zinc, nickel, lead and tin advanced. The gauge slumped 27 percent last year as China economic growth slowed, fueling demand concerns.

Going Long

Gold extended its longest rally in five months with investors buying holdings in metal-backed funds for the 13th day in a row and miners rallied as precious metals soared. Major precious metal producers Newmont Mining Corp. and Goldcorp Inc. are up 17 percent and 16 percent, respectively, in the past two days.

“We may not see a rally from these levels, but we’re not going to fall much further,” Andy Pfaff, the chief investment officer for commodities at MitonOptimal Group, said by phone from Cape Town, after moving from a short to a long allocation in copper. “Production cuts are starting to get noticed across the complex. “I think the lows are in.”

Before it's here, it's on the Bloomberg Terminal.