Commodity speculators such as cotton are awakened in their dreams of intoxication

Not long ago, the prices of key commodities like cotton and sugar experienced a sharp surge. However, in recent days, the commodity market has started to show signs of correction. This sudden drop is not random—it reflects several underlying factors that have shifted over time. First, the conditions that fueled the previous price rally have changed. The Federal Reserve’s second round of quantitative easing (QE2) initially caused a significant depreciation of the U.S. dollar, which acted as a major driver for the commodity boom. But after the Fed officially announced its QE2 plan, the dollar fell for only two days before beginning a strong rebound—rising by as much as 3.6%. This shift suggests that the initial momentum behind the commodity surge was based on speculative expectations rather than sustainable fundamentals. At the same time, the resurgence of debt crises in Ireland and Portugal was largely ignored by traders who were too focused on the short-term gains from the commodity rally. These economic risks, however, remain real and could have long-term implications. As the market continued to climb despite these warnings, it eventually reached a peak, leading to a sharp reversal when profit-taking began to dominate. Second, changes in domestic macroeconomic policies are playing a role. The October CPI reading of 4.4% pushed the central bank to raise the deposit reserve ratio by 0.5%, signaling a tightening stance. This move has increased expectations of further monetary restraint, and market regulation is expected to become more aggressive. Investors are now more cautious, and the pressure on inflation is likely to intensify. Third, the stock market’s decline has also had a ripple effect on commodities. With equities falling sharply, investor confidence has waned, and this negative sentiment has spilled over into the commodity sector. The "two cities" (likely referring to the Shanghai and Shenzhen stock exchanges) have also seen significant declines, further contributing to the overall bearish mood. Fourth, the rapid rise in bulk commodity prices has made the market vulnerable to a correction. The Zhengzhou Commodity Exchange Index, for example, nearly doubled in just two months. Such a steep increase has created strong profit-taking pressure, and any sign of weakness could trigger a swift sell-off. With large amounts of capital seeking to lock in gains, and bearish forces building up, the market is now at a critical juncture. Looking ahead, the current adjustment in the commodity market may be just an intermediate phase. If the U.S. dollar index continues its upward trend, the correction in commodities could become more severe. On the other hand, if the dollar's rebound is short-lived, the commodity market may only experience a minor pullback. For now, traders and investors are closely watching both global economic indicators and central bank actions, as they will determine the next direction of the market.