Digging Into The Metals And Mining Rally

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Includes: BDD, BDG-OLD, BOM, BOS, CPER, CUPM, DBB, FOIL, HEVY, JJCTF, JJM, JJN, JJT, JJU-OLD, LD, LEDD, NINI, RJZ, UBM, XME
by: Richard Turnill

Key points

  • We see many factors supporting industrial metals prices from here but favor a selective approach to metals and mining equities and bonds.
  • The U.S. dollar fell and equity market volatility plumbed lows last week. Many U.S. and Japanese earnings results exceeded expectations.
  • Friday's U.S. wage growth data will be in focus after weak inflation readings and a cautious Federal Reserve outlook.

Industrial metals have rallied on healthy demand and lower supply, and bellwether firms in related sectors have reported upbeat earnings and outlooks. We see stability in commodities prices but are selective in related stocks and bonds.

Performance of industrial metals and related equities, 2011-2017

Sources: BlackRock Investment Institute, with data from MSCI and Bloomberg, July 2017.
Notes: Metals and mining equities are represented by the MSCI World Metals and Mining Total Return Index. Industrial metals are represented by the Bloomberg Industrial Metals Total Return Index. The lines show the percentage change in these indexes since the start of 2011.

Industrial metals have generally outperformed their commodity peers this year, with copper prices hitting a two-year high last week. A big reason for the rally: Production has been falling from last year's levels. This is a result of firms cutting capital expenditures after multi-year price slides. Related stocks have closely tracked metals prices, as the chart above shows.

A stable price backdrop

We see signs that reduced supply and increased demand may be more than temporary and are likely to help keep industrial metals prices stable from here. Metals and mining firms have been improving their balance sheets by reducing debt and decreasing investment in additional production capacity. Ongoing supply-side reforms in China, meanwhile, are curtailing overproduction of certain metals.

On the demand side, we see sustained global economic expansion and relatively healthy demand from China providing support. Our base case: Chinese demand growth should slow only gradually as the country rebalances its economy toward consumption. Risks to this supportive backdrop are any re-emergence of value-destructive mergers that have long dogged the sector, as well as escalating trade tensions between the U.S. and China.

The steady price backdrop in metals and mining appears to be reflected in the prices of many related assets. We advocate a neutral stance to metals and mining stocks overall. We do see opportunities in emerging market companies as well as in global firms with robust cash flows and dividend-growth potential. We favor a selective approach to metals and mining companies' debt, with a preference for higher-quality high yield bonds.

  • The VIX index hit a record low amid persistently subdued S&P 500 historical volatility, and the U.S. dollar fell to a 13-month low against a basket of currencies.
  • Many U.S. and Japanese firms surprised to the upside on earnings per share, while earnings misses globally triggered sharp individual share price declines. A strengthening euro began to weigh on European earnings estimates.
  • The Fed hinted at a September balance-sheet-reduction announcement. The U.S. Employment Cost Index and U.S. gross domestic product (GDP) grew slightly less than expected. Germany's core inflation hit its highest rate since 2008.

Global snapshot

Weekly and 12-month performance of selected assets

Equities Week YTD 12 Months Div. Yield
U.S. Large Caps 0.0% 10.4% 13.9% 2.0%
U.S. Small Caps -0.4% 6.1% 19.0% 1.2%
Non-U.S. World 0.3% 18.0% 20.3% 3.0%
Non-U.S. Developed 0.2% 16.8% 19.6% 3.2%
Japan -0.3% 11.8% 17.8% 2.1%
Emerging 0.3% 25.1% 24.2% 2.5%
Asia ex-Japan 0.4% 28.7% 25.6% 2.4%

Bonds Week YTD 12 Months Yield
U.S. Treasuries -0.3% 2.0% -2.2% 2.3%
U.S. TIPS 0.1% 1.4% -0.6% 2.2%
U.S. Investment Grade -0.3% 4.6% 1.9% 3.1%
U.S. High Yield 0.2% 6.1% 10.8% 5.4%
U.S. Municipals -0.1% 4.4% 0.3% 2.2%
Non-U.S. Developed 0.4% 8.6% -1.0% 0.8%
Emerging Market $ Bonds -0.2% 7.0% 5.0% 5.3%

Commodities Week YTD 12 Months Level
Brent Crude Oil 9.3% -7.6% 23.0% $52.52
Gold 1.2% 10.6% -4.9% $1,270
Copper 5.3% 14.3% 29.2% $6,325

Currencies Week YTD 12 Months Level
Euro/USD 0.8% 11.7% 6.1% 1.18
USD/Yen -0.4% -5.4% 5.1% 110.68
Pound/USD 1.1% 6.5% -0.2% 1.31

Source: Bloomberg. As of July 28, 2017.
Notes: Weekly data through Friday. Equity and bond performance are measured in total index returns in U.S. dollars. U.S. large caps are represented by the S&P 500 Index; U.S. small caps are represented by the Russell 2000 Index; Non-U.S. world equity by the MSCI ACWI ex U.S.; non-U.S. developed equity by the MSCI EAFE Index; Japan, Emerging and Asia ex-Japan by their respective MSCI Indexes; U.S. Treasuries by the Bloomberg Barclays U.S. Treasury Index; U.S. TIPS by the U.S. Treasury Inflation Notes Total Return Index; U.S. investment grade by the Bloomberg Barclays U.S. Corporate Index; U.S. high yield by the Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index; U.S. municipals by the Bloomberg Barclays Municipal Bond Index; non-U.S. developed bonds by the Bloomberg Barclays Global Aggregate ex USD; and emerging market $ bonds by the JP Morgan EMBI Global Diversified Index. Brent crude oil prices are in U.S. dollars per barrel, gold prices are in U.S. dollar per troy ounce and copper prices are in U.S. dollar per metric ton. The Euro/USD level is represented by U.S. dollar per euro, USD/JPY by yen per U.S. dollar and Pound/USD by U.S. dollar per pound. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. Past performance is not indicative of future results.

Asset class views

Views from a U.S. dollar perspective over a three-month horizon

This post originally appeared on the BlackRock Blog.