Global commodity futures markets experienced a major correction over the last five days of trading, as the bullish news from Benjamin Bernanke and the Federal Reserve gave way to much more bearish sentiment from the People's Bank of China and Ireland. The Thomson Reuters/CRB Index, which tracks the prices of 19 key raw materials, dropped 3.2 percent to 296.22, leaving the index down 7.2 percent since November 9.
That would be the most dramatic five-session decline in over a year, reported Bloomberg News.
At the same time, the dollar index rose, indicating the strength of the greenback against six other currencies: the Japanese yen, the euro, the British pound, the Swiss franc, the Canadian dollar and the Swedish krona.
Bad news came from both sides of the world over the week. Supporting the dollar is the threat of another euro-zone meltdown, this time in Ireland. The Emerald isle, which profited handsomely from the boom years during between 2001 and 2007, is now deep in a pool of red ink. Though the government insists that it won't need bailout funds from the European Union or the International Monetary Fund to prop up its financial sector, deficits are projected to exceed 30 percent of gross domestic product next year.
Total Irish public debt is about 65 percent of GDP – not great, but better than Greece's 126 percent.
Before QE2 dominated headlines, the debt loads of European nations helped push the euro closer to parity with the dollar – and the rising greenback didn't do much for commodity futures. Once investors decided that the Fed printing money was a bigger concern, the risk trade was back on, the dollar fell and commodities and the euro recovered.
If Greek and Irish debt problems seize the headlines again, the result could be a sustained period of correction and profit-taking. Interest rate futures on sovereign debt have repeatedly surged upwards, indicating that unless these nations get their finances under control, borrowing could become ruinously expensive.
The problem is that many austerity measures, like cutting benefits and raising taxes, hurt growth and investment, creating a vicious cycle. That leaves just the prospect of equally painful external aid.
"There's a global concern that if Ireland needs aid, it could become a domino effect with other countries," said Cort
Gwon, director of trading strategies and research at FBN Securities in New York, told Reuters. "Especially at such a sensitive time in the economy to have a setback in Europe could mean a setback for the rest of the world, too."
The other major impact came from the Chinese government, which is struggling to contain inflation as its economy roars ahead of those in the developed world. The China Securities Journal cited an anonymous source who said that the government might impose limits on the price of food while punishing agricultural commodities futures speculators, according to Bloomberg..
The People's Bank of China might also raise interest rates.
"The concerns about further monetary tightening in China, that’s caused a big sell-off," Nic Johnson, a commodity portfolio manager at PIMCO, told Bloomberg. "People had bid up a lot of these commodities. Now, what you're seeing is a healthy correction back toward where fundamental demand levels are."
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