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China could be what determines whether the bottom is in for commodities

Copper wire. The commodity was trading at five-year lows Wednesday.
Muriel de Seze | Photodisc | Getty Images
Copper wire. The commodity was trading at five-year lows Wednesday.

The painful sell-off in some commodities may be over for now, but a blast of major Chinese economic reports early next week could put any recent rallies to the test.

While many Wall Street strategists see signs of a broader bottoming process, there is no consensus that the commodities crash is actually over, particularly for copper.

Nonetheless, a bundle of Chinese data Monday, including GDP, retail sales and industrial output, could set the course for these markets next week. Analysts believe China's economy must show improvement, or at least stop declining, before some base metals and other commodities see a real rebound. The concern is that any unexpected weakness in the data could mean a hard landing is ahead.

"The services sector seems to be growing pretty quickly, but if you look at industrial activity, it looks awful. ... What I'm really worried about is still the industrial sector. It's got a real challenge ahead. I think the market will respond negatively in general if industrial capacity is softer than expected. I think the market is very interested in consumer data at this point," said Francisco Blanch, head of global commodities and derivatives research at Bank of America Merrill Lynch.

Blanch said he expects base metals, reliant on Chinese demand, to continue to struggle. He sees continued weakness in iron ore, thermal coal and copper.

"I think the market has probably bottomed for now. I see the risk of a relapse for the first half of next year. But I think on the flip side, the market is probably going to find some stability, and will have a hard time breaking the lows that we posted a month and a half ago. That's for oil, aluminum probably zinc, but I still think copper goes down. We have a lot of supply," said Blanch.

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Likewise, market confusion over whether the Fed is hiking rates this year or not has helped support a rally in gold and other precious metals since the U.S. central bank left rates unchanged at its September meeting. But the question is will demand continue to support gold or will the rally fade when the Fed does raise rates.

Gold has erased its losses for the year, and futures are about 6 percent higher since the Fed's meeting. Gold futures were trading slightly lower, at $1,182 per ounce Friday.

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Dennis Gartman, publisher of The Gartman Letter, said he believes that commodities markets have put in their lows across the board, and that it was a sign when commodities firm Glencore and others were forced to slash capacity.

The Chinese data could be a key test of his theory. "Is the market going down when bad news comes out? And the answer is no. They don't do that anymore. It's already built in. When the news is of economic weakness, and copper doesn't fall, it tells you something has changed," he said.

China's third-quarter growth is expected to slow to 6.8 percent, from 7 percent in the second quarter, according to economists polled by Thomson Reuters. But there is a great deal of skepticism that the number is massaged, though the government has disputed that.

JPMorgan economist David Hensley said he will be watching industrial output more than GDP, since the September monthly data are more credible and should show what momentum is like going into the fourth quarter.

Read MoreChina's growth seen weakest since 2009

"I think people care more about Chinese manufacturing output and goods demand and trade flows. That's the way in which they're affecting the rest of the world," said Hensley.

Read MoreWhat the big banks expect for China GDP

Industrial output was up 6.1 percent year over year in August and is expected to slip to 6 percent in September, according to Thomson Reuters. Industrial production fell below 7 percent in February and reached a low of 5.6 in March, according to Thomson Reuters.

Copper futures were down about 1 percent Friday, falling from one-month highs on worries about the Chinese data and after reports of an 11 percent jump in warehouse supplies, monitored by the Shanghai Futures Exchange.

"The Chinese data could impact the metal. I think China would be a major factor," said RBC commodities analyst George Gero. "We've been negatively surprised by Chinese figures recently, and there's no reason to expect a positive number for Monday."

The view on whether copper has set a low diverge. Barclays, for instance, says it retains a bearish view on the metal and expects a very modest recovery next year to $5,625 per ton, but it expects a period of turbulence where supply will continue to rise and demand will struggle.

But Citigroup sees it differently, and thinks capacity reduction is helping curb oversupply. "We think supply cuts are starting to bite. From that perspective we're taking levels closer to $6,000," said Citigroup commodities analyst Aakash Doshi.

"We think there's good support right now at $5,000. The risk is to the upside rather than the downside," said Doshi. Copper was around $5,255 a ton on the LME Friday.

"Industrial production has come off in China over the last year, but interestingly enough what we find is copper demand globally is more linked to the electronic consumer sector, as opposed to just construction and real estate," he said.

But Barclays analysts wrote in a note that China is the most crucial factor, and so far they see "little evidence of a demand recovery in China. Though the mood is uniformly negative towards China this year, there are hopes for a better 2016. Although copper stocks in China have declined and property sales have rebounded, these developments are fighting larger headwinds."

While analysts believe gold has set a low for now, they disagree on how long the rally can last.

HSBC's chief commodities analyst, Jim Steel, said he believes that gold bottomed in August, and that it should average more than $1,200 an ounce next year. "The coin demand for gold and silver is up quite substantially. When silver dropped below $15 (an ounce) and gold dropped below $1,100, we saw a real strong response in the retail market. In the case of silver, we have likely reduced mine output," he said.

Citigroup, however, expects the gold rally to fizzle. "I think a big part of that is the confusion and changes provided by the Fed and the dollar weakness," said Doshi.

"We don't expect a sustained rally. ... Once the Fed lifts off, we do think gold will lose its luster. It's clearly supported in the short term, given this environment."