China's commodities meltdown could rock the markets

For the moment, the following is the shock NOT heard 'round the world … at least not yet.

Rampant speculation in China's commodities markets could very well be the next "black swan" event that rocks global markets and possibly the global economy. Though very little attention has been paid to this recent action, speculative excesses in China's commodity markets have taken traders and investors on a wild ride, which may likely soon spill over to the rest of the world.

Chinese steel companies are a key source of risky debt.
Kevin Frayer | Getty Images
Chinese steel companies are a key source of risky debt.

Trading volumes and volatility have been so extreme they make the recent swings in Shanghai and Shenzhen's stock markets look mild by comparison. Chinese speculators have driven up, and then down, the prices of everything from iron ore to steel, and from soybeans to egg futures.

Prices in most of these commodities have fallen back to earth after massive, but relatively brief, spikes in prices. But, that's not to say more damage hasn't been done to China's already fragile market system and economy.

One truly astonishing feature of this bout of speculation is that the average holding period of a commodity futures contract was just three hours in April, according to a Bloomberg article. That makes other speculative trading episodes look like long-term investing.

It also suggests a massive appetite for risk, which in and of itself, is potentially destabilizing, both in China and, by extension, elsewhere in the world.

Why do we care?

Well, first of all, the recent rebound in commodity prices, here at home, and the affiliated rebound in raw materials stocks, could have been driven, at least in part, by those very speculative excesses in China.

It also means that the rebound in inflation expectations could be a false signal, which on its face, reads as an indicator of a rebound in demand for raw materials, or a sign that the global economy could be stabilizing and re-accelerating.

That's the type of false signal that could convince the Fed that inflation is accelerating, causing them to mistakenly raise rates. While that hasn't happened yet, it is a risk that bears watching.

The "fake-out breakout" also could have suggested that supply of, and demand for, raw materials is coming back into balance in a world burdened by a commodity glut. That, too, appears to be have been a diversion.

There is still more cotton, more copper, more steel and more soybeans than the world demands. The market-based signaling matrix appears to be broken thanks to this bout of speculative excess.

This is the Wild Wild East of markets these days. After speculating excessively in real estate a few years ago, in stocks last year, driven by heavy margin buying and then a crash, Chinese investors and traders have quickly moved on to commodities.

These rolling bubbles are making the Chinese economy more and more unstable and more susceptible to a much-feared "hard landing" in the economy.

That has implications for the Mild Mild West, where growth has been hard to come by and could be upended by another deceleration in Chinese economic activity.

My long-time friend and colleague, John Bollinger, the former in-house technical analyst for Financial News Network and CNBC, taught me to make a list every night for what might blindside me the next day. It was a practice he developed over the years to avoid getting caught wrong-footed in the markets.

This is one of those items. There is precious little transparency in Chinese equities and Chinese banking, let alone in the underdeveloped Chinese commodities markets.

But one needs to watch closely for imbalances like these, which, while seemingly quite localized, could have global implications.

Now that commodity prices in China have fallen back to earth, it wouldn't surprise me to see the commodity rally collapse here at home.

Traders have scored some big gains in commodity stocks, from steelmakers to copper miners. This could be a moment to trim those holdings back and prepare for a pullback in commodities that might be as profitable from the short side, as the recent rally was from the long side.

And remember to make your blindside list nightly. You never know where the next surprise may be coming from!

Commentary by Ron Insana, a CNBC and MSNBC contributor and the author of four books on Wall Street. Follow him on Twitter @rinsana.

For more insight from CNBC contributors, follow @CNBCopinion on Twitter.