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Wednesday Look Ahead: Traders Watching to See if Commodities Will Continue to Cool

The hot commodities trade caught a chill Tuesday and could continue to struggle in the short term as some excess is wrung from the markets.

Commodities traders at the New York Mercantile Exchange.
Photo: Oliver Quillia for CNBC.com
Commodities traders at the New York Mercantile Exchange.

Metals were among the bigger casualties, with goldlosing 3.1 percent; silver down 5.2 percent, and copper down nearly 2 percent. The metals had recovered some ground in early Asian trading.

"I think the bulk of the reason for the decline is profit-taking and also a little bit of risk has gone off the table, which could have encouraged a little sell off in the metals as well. We haven't had as much flows into the ETFs as we've been used to, and I think the combination has taken us down," said Jim Steel, chief commodities strategist at HSBC.

"I think the market will be on the defensive with profit-taking going on for a bit, but not necessarily by the end of the week," Steel said.

He said one bearish sign for the precious metals was the fact that the U.S. Mint issued a report showing that sales of silver coins declined in December, after gaining the previous 11 months. Gold coin sales had been declining all of last year, as the metal's price rose. The U.S. Mint Monday said sales of its American Eagle gold coins fell 14 percent last year to 1.221 million ounces, but for the year, silver bullion coins jumped by 20 percent to 34.663 million ounces."It's the same thing that's deterring some of the ETF demand, but things like quantitative easing, the European sovereign debt crisis; financial market volatility, all of these things remain in tact. I don't see that the bull market is necessarily over, but the correction is here. It's got the makings of a significant one, particularly for silver," Steel said.

Stocks waffled Tuesday after a strong showing Monday, and among the worst decliners were energy and materials shares, as well as consumer discretionary stocks. TheDow was up 20 at 11,691, but the S&P 500was off 1 at 1270, and the Nasdaq fell 10 to 2681.

The dollar rose against some currencies, with the dollar index rising to 79.433 form 79.152 late Monday. The dollar was also stronger against the euro, which was at 1.3305.

Treasury prices were flattish, with the yield on the 10-year note at 3.33 percent. The Fed Tuesday afternoon released the minutes of its last meeting, which showed no change in its intention to buy $600 billion in Treasury securities under its "quantitative easing" program. The Fed's Federal Open Market Committee did note that economic data during the period since its November meeting "had increaseid their confidence in the economic recovery."

They also expected growth, which had been moderate, to improve slightly. They pointed to production and household spending strengthening.

"I thought the movement in their forecast was very modest," said J.P. Morgan economist Michael Feroli, adding the Fed did not really alter its medium term forecast.

"Relative to the investor community, their (outlook is) very little changed. To the investment community, it's morning in America, but for the Fed, it's 'eh,'" said Feroli.

Markets are especially focused on Friday's December employment report, after a streak of improving data. Wednesday's reports include ADP's private sector payroll report at 8:15 a.m. and ISM nonmanufacturing data at 10 a.m.

Oilalso took a tumble Tuesday, finishing the day at $89.38 per barrel, down 2.4 percent.

"I think the trend is still up, but I'm waiting for a pullback in the (oil) market and this may be the beginning of it," said Ray Carbone, president of Paramount Options.

"We haven't seen all these longs in the market for four years, and if everybody's long, there's no lone left to buy it. The fundamentals do not support the rally," he said, adding that OPEC has 6-6.5 million barrels of spare capacity. Oil inventory data is released by the EIA Wednesday morning.

"Nothing goes straight up. We have gone straight up since the beginning of December. A pull back is what the market needs to go higher," said Carbone.

The drop in oil prices came as more and more analysts and investors expect to see $100 per barrel oil this year. Carbone said he expects it to reach that level at some point, but the market could be under pressure first.

"We had long liquidation today, Then we had a short-covering rally at the end. I think over the next two weeks or month, we're going to see pressure on crude oil. The equities markets took a big break today. You saw the euro give back its gains early in the day, and the dollar go up," he said. "The equities market correlation is still pretty much in tact. If it keeps going up, I think it's going to pull oil with it."

Carbone said a level the market may test is all the way down to $80.50. "$80.50 is a great number. Will it get that low? Maybe not, because a lot of people are waiting for the same thing I am," he said.

Questions? Comments? Email us at marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

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