Surging fears of Armageddon in the global financial system ravaged a wide selection of commodities across Asia as groups ranging from hedge funds to day traders spent the day in a headlong flight from risk.

The shock waves from the bankruptcy of Lehman Brothers reverberated through markets for vegetable oil, soy beans, rubber and industrial metals as confidence in the financial system faltered, global growth prospects dimmed and cash became king.

Broad baskets of commodities — once seen by speculators as a sure-fire bet because of China and India’s apparently unstoppable growth — were sold, with food and metals tracking the sharp declines in crude oil.

Dealing floors in Asia descended into mayhem as analysts forecast a period where commodity markets were effectively “frozen” by a sudden drought of fresh capital.

A rising panic of defaults on futures positions and deferments of contracts sliced through all previous levels of commodity support: Chinese and Indian buyers have already cancelled around 800,000 tons of palm oil imports and the number appears likely to rise. In Kuala Lumpur, palm oil futures took a 5 per cent nose dive to hit a 17-month low and appeared likely to fall by their daily limit.

On the Dalian Commodity Exchange in northern China — the most active soybean bourse in the world — contracts on some soy oil products plunged by their daily limit of 4.9 per cent. Tuesday trading in US corn futures also saw heavy selling.

As crude oil slumped by another $4 per barrel in Singapore, Tokyo brokers gave warning that global hedge funds with major commodity positions may have effectively collapsed overnight.

The Lehman bankruptcy has exposed some of the fragility of growth projections, said dealers at Tokyo Mitsubishi: with the US economy in potentially deep trouble from the toxicity of Wall Street and with the worldwide system of capital choking, the arguments that supported commodity bullishness have faded fast.

As investors sought to liquefy positions as quickly as possible, currency traders at Royal Bank of Scotland said that the notoriously volatile yen carry trade had also seen “massive unwinding”. The yen soared against the dollar by its biggest one-day margin in nine years as investors rapidly reversed their positions.

The yen carry trade, in which yen is borrowed cheaply to finance speculative, higher yielding investments elsewhere in the world, is thought to have financed much of the unprecedented commodity bubble, which inflated earlier in the year and forced much price inflation across Asia and the rest of the world. A heavy bout of yen carry trade unwinding was behind the huge drop in global stocks in August 2007 when the sub-prime debacle first exploded.

Hedge funds, which have been increasingly starved of capital since the credit crunch made its mark, are thought to have been particularly hungry users of the yen carry trade. Hedge fund sales are thought to account for Tuesday’s 7 per cent drop in Indonesian stocks, which had previously been owned as a proxy for commodity price inflation.

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