Commodities crumbled Tuesday, falling by their most in eight weeks, as energy, metals and agricultural investors took profit on the heady gains made on thin holiday volume over the past two weeks.
The Reuters-Jefferies CRB index dropped nearly 2 per cent in its sharpest one-day fall since mid-November after investors and traders worldwide returned to work from holidays to find many markets had run up to their highest in two years or more.
With the absence of any major catalyst for risk aversion - China did not announce new interest rate hikes and the dollar rose less than half per cent against other currencies - the correction seemed triggered at least in part by investor unease that prices had moved up too fast on too little trade.
"We've had a nice run in the last two to three weeks and we can't go lock-step up every day," said Evan Smith, co-manager at the $850-million commodities-based Global Resources Fund at U.S. Global Investors. "You're always going to have some volatility in a bull market and we're still in a bull market."
Smith said the "growth story" in commodities, which had fueled a near tripling in oil prices since the worst of the recession and led to a broad recovery in almost all other markets, had not changed.
"The global economy seems to be picking up. The supply issues haven't gone away for copper or even coal out of Australia. So, I don't think we're seeing a turning point in the market for commodities right now."
The 19-commodity CRB rose 15 per cent in 2010, with an over 10 per cent gain in December alone, the best month since May 2009 when commodities were rebounding from their lows.
The last time the CRB experienced a drop like Tuesday's was in November when futures exchanges raised trading margins on some niche commodities; the dollar rocketed on Ireland's debt woes and investors sold off in anticipation of further monetary tightening by China.
Some suggested the selling was exacerbated by investors trying to get ahead of a rebalancing of commodity indexes that would take place over the next week or so.
The Dow-Jones UBS and SPGSCI commodity indexes are cutting exposure to the agriculture sector under the rebalancing, explaining the outlier losses in markets such as cocoa and sugar .
Analysts also cited the fact that recent data from Asia - the bedrock of the commodities rebound since the financial crisis - had been less than supportive, in spite of an improvement in U.S. and European indicators.
"The few macro items that have been released thus far over the past few weeks have been mixed in tone, and strangely, the weaker numbers are - for a change- coming out of Asia," said Ed Meir, senior commodities analyst at MF Global in New York.
"The weaker Asian macro numbers have not done much to derail the advance, but we have to suspect that additional reports like this will be increasingly difficult to ignore."
China, the world's No. 2 economy and a giant consumer of oil, metals and grains, reported that its manufacturing sector grew at its weakest pace in three months in December.
Beijing's latest purchasing managers' index - a key measure of inflation and growth - also saw its first decline in five months after China ramped up moves to rein in its runaway economy.
Crude oil settled 2.4 per cent lower while soybeans dipped 1 per cent, both having hit their highest since mid-2008 over the last week.
Copper fell 2 per cent in New York, its sharpest drop since Dec. 15, after having hit a succession of record highs as traders figured the constrained supply and a lack of substitutes made it one of the top picks for 2011.
Soft commodities plunged as a group, with raw sugar the outlier, losing 3.5 per cent. In other niche commodities, silver dominated falls, shedding 5 per cent after scaling 30-year highs just a week ago.
Activity across all markets picked up dramatically as traders returned from holiday, with volume at mid-session already in excess of any day over the past two weeks.