The surprise timing of the People's Bank of China (PBOC) increase in benchmark lending and deposit interest rates is likely to weigh on commodity markets when trading starts on Monday.
On Christmas Day, the PBOC raised rates by 25 basis points, the second rate rise in just over two months, part of a series of measures designed to combat inflation which hit a 28-month high of 5.1 percent in November.
The opportunity to cash in on prices at or near their highest in years before the year end could mean the correction this time may be greater than the losses following the last interest rate hike in October.
While the market expected China to raise rates, some investors had thought it was too late to move in 2010, and for that reason China's commodity markets may test their downside limits on Monday.
This certainly doesn't spell the end of the commodities boom or the strong China story. It's a smart move that may have caught the market off guard, Mark Pervan, senior commodities analyst at ANZ said.
This may give some impetus for some profit taking before the end of the year, and an opportunity to buy on dips.
U.S. oil ended last week around a two-year high, above $91 per barrel while soybeans surged to a 27-month high, and copper flirted with record peaks.
Some analysts said after a lower open, markets could rebound and even hit new highs. Because the rate hike was modest and overall the real deposit rates are still in the negative territory. Money supply was not tightened strictly enough, Gu Jianjun at Jinyuan Futures said.
Western markets, such as corn and soy futures on the Chicago Board of Trade, may be particularly choppy, as the kneejerk reaction to the rate move is accentuated by holiday-thinned volume.
When China last raised interest rates in mid-October, it sent the dollar higher, dragged gold down by more than 2 percent, oil fell 4 percent, copper lost almost 2.5 percent, and losses of 2.7 percent in wheat and 2 percent in corn.
But that, and other policy tightening choppy did little to slow commodities' march higher.
China is the world's top consumer of a host of commodity products, including copper, iron ore, coal, cotton and soy and is the second largest consumer of corn, gold and crude oil.
The Reuters-Jefferies CRB index <.CRB>, which tracks 19 commodities, fell almost 2 percent.
Assessing the effect on some markets will be complicated by the Christmas holidays which see British-based markets such as the London Metal Exchange and London-based agricultural contracts, including softs, on NYSE Liffe closed on Monday and Tuesday, while markets in China and the United States reopen on Monday.
It is a little bit of a surprise, but the move should be welcomed by the market. The central bank has increased the interest rates before the end of 2010, which means the possibility of increasing interest rates in the beginning of 2011 will be smaller, said He Yifeng, analyst at Hongyuan Securities in Beijing.
I don't think the central bank will increase interest rates before March.
After the initial reaction, analysts said the move may prove to be positive, reaffirming November's message that China's leaders are acting to stem inflation and control prices if needed.
That along with China's plans to go to the world to stock up on commodities, especially grains, makes for a bullish outlook for 2011, analysts said.
It will be bearish for agricultural prices, which have rebounded recently. But we believe the impact will be short-lived and not hit the bullish trend, especially of the soy market, which will be supported by the drought in the South America. Right now its also the peak consuming season in China, said Wang Ping, analyst with Dongwu Futures.
China has run down many of its agricultural stockpiles this year to stop strong demand driving up prices. Many markets, especially corn, sugar and cotton surged to record highs.
Given limited farmland and rising consumption, analysts believe the government's goal of self-sufficiency in grains -- rice, wheat and corn -- may force China to import other farm products which compete for acreage, such as soy, cotton and sugar.
(Additional reporting by Niu Shuping and Zheng Xiaolu; editing by Robert Birsel)