Why markets were caught short by the commodities sell-off

The severity of the sell-off in commodities suggests that markets vastly underestimated the impact of the unwinding of carry trades alongside spluttering growth in China and weakness elsewhere.

The plunge in oil prices and the highly-correlated declines in other commodity prices probably should have been anticipated by the markets, in which case the pace of the declines would have been more measured.

The sell-off should have been anticipated because it is apparent that, quite separate to the fundamentals -- China's economic slowdown, the eurozone's continuing flat-lining, Japan's inability to ignite growth, the shale oil boom in the US -- there is what some analysts have described as the 'de-financialisation' of commodities occurring.

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