Spooked!

12/11/10 -- All commodity markets have a severe dose of the jitters this morning, with everything from sugar to soybeans to zinc sharply lower.

Talk of a Chinese interest rate rise as early as over the weekend is one of the major reasons behind the move. With large spec longs in just about all commodities there's been a bit of a scramble to get out of the exit door first.

The Chinese are keen to rein in inflation. Having already ordered an increase in bank reserve requirements early in the week to curb "reckless" lending, a second interest rate rise in a month could be on the cards.

The theory is that raising rates will lead to further yuan appreciation and cool demand for commodities, many of which have set multi-year highs this week.

Cotton, sugar, soybeans, copper and zinc all crashed down the daily limit on Chinese markets early this morning.

On the overnight Globex market soyoil is currently down more than 200 points, with soybeans around 40c lower, wheat down 12-14c and corn down 8-10c. Palm oil had it's biggest daily fall in more than a year on the on the Malaysia Derivatives Exchange overnight. London sugar is down 8.5% in early trade this morning, slumping to its lowest levels this month.

There is also some market nervousness over the current G20 meeting in Seoul, and talk of Ireland defaulting on it's sovereign debt. The the risk premium between Irish 10-year bonds and benchmark German 10-year bunds is now at what analysts are calling "unsustainable" levels.

That is causing euro weakness and also a flight to the US dollar as risk aversion creeps back into the market.

The big question now of course is are we looking at a major reversal or a buying opportunity? Well, the last time that the People’s Bank of China rose interest rates was October 19th - which was in fact the first movement on rates in three years.

The market got similarly spooked then, which last all of a day as I recall.