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By: Annie Pei
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The market is getting the timing of the Fed rate hike wrong, and it could deliver a big blow to stocks, according to one hedge fund manager who's turned negative on the markets.
"The Fed funds futures are pricing in less than a 40 percent probability of a hike by the September meeting. and only a 59 percent probability of a hike this year," Matarin Capital co-founder and hedge fund manager Nili Gilbert said recently on CNBC's "Futures Now. "That is a pretty low probability given what we are seeing with a rebound in cyclicals, materials and energy."
Wall Street firms BNP Paribas and IHS Global Insight predict that a rate hike won't happen until late this year at the earliest. But while there's a markedly low chance it will happen at next week's Federal Reserve meeting, Gilbert makes the case the markets will see one as early as July.
"We actually think that the Fed may be more likely to raise rates this year than what is currently being discounted in the market, and that's because we believe that future inflation may make it increasingly difficult for monetary policy in the U.S. to remain as accommodative as it is today," she said.
Gilbert's firm, which has $740 million in assets under management, has a long/short strategies fund that claims the ability to navigate "any market," and a separate futures portfolio.
Now she's cautious and holding a large cash position.
"Our stock market outlook is somewhat negative for most countries, and that's because we expect that if the Fed has to increase rates earlier or more than what is expected, then it's going to be quite a negative surprise," she said.
The other major element she's watching: Whether Britain will decide to leave the European Union.
"The markets really haven't priced in much of a probability of Brexit," said Gilbert. "If there were a Brexit in the near term, there would certainly be a lot of uncertainty, a lot of volatility, and that just doesn't seem to be priced into the markets right now. So it could be very unsettling."
The Federal Reserve may be in a box when it comes to conducting monetary policy — a scenario likely exacerbated by disappointing jobs report numbers released last week.
Just 38,000 jobs were added to U.S. payrolls in May, the weakest performance in nearly six years. The data stoked new fears about the economy's health, and threw cold water on the Fed's recent hints at higher rates in the coming months.
"Friday's data again pushes back decisions," said Saxo Bank chief economist and chief investment officer Steen Jakobsen told CNBC recently. "The ability of the Fed to move now is almost entirely based on their 'need' or 'want.'"
Late last month, Fed chief Janet Yellen said in a speech that an interest rate hike was "appropriate" in the near term, and could rise gradually. With that in mind, Jakobsen argued the Fed has painted itself into a corner, as well as other central banks around the world.
After oil touched $50 per barrel for the first time since November, investors remain focused on the potential outcome of this week's OPEC meeting in Vienna. However, one of Wall Street's most closely followed analysts has a clear message: The event is meaningless.
"I see nothing of consequence that will be discussed at this meeting," Tom Kloza said Tuesday on CNBC's "Futures Now."
The global head of energy analysis at the Oil Price Information Service is adamant that no progress was made between Saudi Arabia and Iran during OPEC's last gathering in Doha, Qatar. Therefore, he believes that the table is not set for any sort of announcement regarding a freeze or cut in June.
"One can argue that OPEC is no longer a cartel, at least in the classic sense of a cartel having influence over supply and prices," noted Kloza in a note. So, with OPEC irrelevant in Kloza's eyes, he has turned his attention to the Federal Reserve as a key factor regarding the price of oil.
"There's no question that higher interest rates and less easy money are going to complicate the oil business," he said on "Futures Now."
The S&P 500 is in an unusual rut: It hasn't reached a new high in more than a year.
This scenario has only happened 16 times since World War II, and it's generally been seen amid deep market corrections. But investors might want to think twice about throwing in the towel.
"We looked at cases when you went this long without a new one-year high, and it's actually quite rare," Ed Clissold, chief U.S. strategist at Ned Davis Research, said recently on CNBC's "Futures Now." "There's a big dichotomy depending on how big the market declined during that one year walk through the wilderness."
The S&P last hit a yearly high — and an all-time record — of 2,134.72 on May 20, 2015. Since then, the index has fallen as much as 15 percent without hitting a new high. But Clissold doesn't find this alarming.
"If there was a really big decline greater than 20 percent during that one-year period, which is a classic bear market, actually the market really struggled after that," he said.
History shows that bigger declines have foreshadowed longer periods of recovery and smaller gains over the next year, while smaller drops have led to quicker returns to new highs and bigger gains over the subsequent year, according to Clissold.
He also points out that sentiment gauges he follows closely have shown a high level of pessimism — more than one might expect given the "small decline" we've had over the past couple of months.
"I think that would bode well for the market eventually working its way higher and breaking out to new highs," he said.
And if the Federal Reserve raises interest rates by a quarter point within the next couple of months, Clissold believes it could actually push stocks even higher.
"July seems to be more likely [than a June rate hike]. So once that uncertainty clears up one way or the other in the grand scheme of things, one rate hike probably isn't going to kill this market. So you get that uncertainty lifted and the market could move higher from there," he said.
He sees the S&P ending the year at 2,200, 5 percent above Tuesday's closing price.
One Wall Street firm predicts stocks are about to surge, but it could be over within the blink of an eye.
Investors are anticipating the outcome of the June meeting of the Federal Open Market Committee, at a time when Federal Reserve policymakers have hinted at raising borrowing costs. On Friday, Fed Chair Janet Yellen said that an interest rate hike in the coming months would be appropriate, given the economic data.
Some Wall Street watchers think a rate increase could come as early as next month, which could help boost markets as the uncertainty dissipates.
"We could see some kind of rally that could last until the FOMC meeting in a few weeks," Kristina Hooper, head of U.S. capital markets research and strategy at Allianz Global Investors, recently told CNBC's "Futures Now. "The market seems to be coming to terms a bit more with the possibility of a Fed rate hike in June."
As a result, Hooper sees the S&P 500 index surging 5 to 10 percent as anxiety over the June Fed meeting dissipates. However, once the Fed makes its decision on rates, she believes uncertainty could climb again in anticipation of the central bank's next move.
"For so many years now, the Fed really has dominated and in many ways dictated risk and reward profiles for asset classes," said Hooper. "That doesn't appear to be going away anytime soon."
Gold's losing streak continued on Tuesday as the precious metal tumbled to its lowest level in more than five weeks. However, one of Wall Street's most closely followed analysts says the dip presents a prime buying opportunity and that bears are reading the market incorrectly.
Ultimately, Boockvar believes that the 2011 highs of around $1,900 for gold are not only reachable, but surpassable, as reasoned that bull markets historically exceed the previous bull market peak at some point.
As Boockvar sees it, it's just a matter of when.
"In order to be bearish on gold, you have to believe that the Fed is going to embark on 100 to 200 basis points of hikes over the next couple of years, which I think is completely unrealistic," added Boockvar. "This is an ideal opportunity for those who have not gotten in."
Citing the relative-strength index, Boockvar said that gold is the most oversold it has been since mid-December. He also added that global interest rates have given trillions of dollars' worth of sovereign bonds negative yield. Coupled with rising Fed rates, this development would theoretically provide gold investors with positive carry on gold. The precious metal is in the midst of its longest losing streak since November 2015.
For additional context, Boockvar highlighted the mid-2000s, when the Fed raised the Federal funds rate from 1 percent to 5 percent. During that time, gold went from $400 to $700. The analyst also cited the start of 2016, when Bank of Japan Governor Haruhiko Kuroda adopted negative interest rates. However, the move failed to help the nation achieve stability in its currency.
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