Copper hit a six-week high on Tuesday, joining a global rally in financial markets as prospects of further monetary easing by central banks helped allay worries about the impact of the euro zone crisis.
A surprising rise in top metals consumer China's services sector, which expanded at its fastest pace in three months in June, also lifted market sentiment.
Three-month copper on the London Metal Exchange jumped 2.5 percent to a session high of $7,815 a tonne on Tuesday, its highest since May 22, before paring some of those gains. It was at $7,775.50 per tonne in official rings from $7,625 at the close on Monday.
“We've had some quite negative data out of the United States, and on the back of this we're seeing weakness in the dollar and expectations that the Fed will act sooner rather than later,” Deutsche Bank analyst Dan Brebner said.
“Also in China there's a growing sense that we may see further stimulus, with another reserve ratio cut, so I think those two things are supporting the base metals.”
US manufacturing shrank in June for the first time in nearly three years, adding to signs of a recovery slowdown but raising hopes for more policy easing by the Federal Reserve, while the fragile state of the euro zone economy prompted anticipation of an interest rate cut by the European Central Bank this week.
Expectations also rose for an imminent cut in the amount of money banks in China are required to hold as reserves after a state-backed paper urged the move in a front-page editorial.
“Overall, the positive effects of policy loosening are starting to filter through economic data,” Credit Suisse said in a research note.
“With external demand subdued, we expect the Chinese authorities to continue with cuts in the reserve ratio requirement ... a cut in lending rates and infrastructure spending to boost domestic demand in the coming months.”
To shore up economic growth, China's central bank cut benchmark interest rates in early June, the first such move since the depths of the 2008/09 global economic crisis. The cut followed three reductions in the bank reserve ratio since November.
The dollar was flat against a basket of currencies, helping underpin base metals prices. A weaker dollar makes dollar-based commodities prices cheaper for holders of other currencies.
In the physical market, traders are bracing for a replay of an April market squeeze that made copper expensive to obtain quickly, saying major trader Glencore controls almost half the inventories of the commodity held in London Metal Exchange-registered warehouses worldwide.
They said a potential rebound of demand in China combined with tightly controlled LME stocks, could constrict the market in oming months in an even more severe version of the events of this spring.
A squeeze gripped the market in April as one entity took control of up to 90 percent of cash contracts and inventories on the LME, facing off against Chinese market participants who were caught with short positions.
In aluminium, Singapore-based traders reported a pick-up in Asian demand after prices fell to a two-year low of $1,832.25 last week and as large volumes of the metal remained locked up in financing deals.
Premiums for the packaging metal had risen to $170 a tonne from $140 two weeks ago, they said.
Investment bank Goldman Sachs said on Tuesday it was bullish about aluminium.
“Aluminium supply growth is expected to remain weak at current prices, and an expected pick up in consumption globally would likely tighten the aluminium balance,” it said in a note.
LME three-month aluminium was $1,948 per tonne in rings, from $1,909 at the close on Monday.
Three-month tin was $19,150 in rings from $18,900 at Monday's close, lead was $1,912 from $1,879 and nickel was $17,180 from $16,750.
Zinc, untraded in rings, was bid at $1,907 from $1,872. - Reuters