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The highly anticipated week of the Federal Reserve's policy decision is finally upon the market. As Wall Street braces for what could be the first interest rate hike in nearly a decade, one top economist warns it's time to buy insurance against whipsaw price action.
On CNBC's "Futures Now" last week, Gluskin Sheff's David Rosenberg said that historically, when interest rates increase, so does volatility. "The VIX [CBOE Volatility Index] is going to rise in the next year. Typically when the Fed starts to raise rates in that first year, it doesn't mean you have a bear market but you do have heightened volatility," he said.
The VIX surged above 20 for this first time in a month on Friday to its highest level since early October. This as a sharp sell-off in U.S. and global equities had investors running for cover. Rosenberg expects the market to stay flat over the next year.
"It could go as high as 28," Rosenberg said of the VIX. Super spikes in it tend to correlate with selling in the S&P 500.
If Donald Trump wins the presidential nomination, it will be terrible for the Republican Party, says Ron Paul, the former GOP presidential hopeful whose son is running for the White House.
Further, said the libertarian former congressman from Texas said, "he wouldn't win, and it would be devastating to the markets, because then you'd have Hillary [Clinton]," whose tax policies would hurt the economy.
Trump leads the GOP field, enjoying the support of 35 percent of Republican primary voters, according to a new CBS News/New York Times poll. That's a substantial rise from 22 percent in October. The new poll, conducted from Friday to Tuesday, found that support for Paul's son, Sen. Rand Paul of Kentucky, is flat at 4 percent.
On the Democratic side, Clinton's support is rock-solid at 52 percent.
The elder Paul said the Republicans could actually force the nomination away from Trump — but at a hefty cost.
"In a way, Republicans can decide who their candidate is. They can write the rules any way they want. But if they deny [the nomination] to Trump, Trump would run as an independent."
Read MoreTrump's comments cost him cash
If "they can't push him out, then somebody else would enter," Paul said. In that way, either a Trump win or a situation in which the nomination is forced away from Trump could result in a split Republican ticket.
"But I think it's more likely that Trump would run as an independent than the mainstream having an independent candidate," Paul said. Trump had said he would consider such an option but later promised not to do so.
How low can it go? That's what all of Wall Street wants to know about oil right now, which has fallen more than 65 percent from its June 2014 high. But according to one expert, the decline could be coming to an end, and that could create a terrific buying opportunity for some beaten equities.
"I do think the trend is lower," Darren Wolfberg told CNBC's "Futures Now" on Tuesday. But "I don't think $20 oil is in the cards," he added, referring to the grisly forecast Goldman Sachs gave the oil market in 2016.
The commodity plunged to a seven-year low on Tuesday, falling below $37 a barrel for the first time since 2009 before staging a stunning rebound, at one point rising as much as 2.5 percent at its high. Oil closed the choppy session at $37.51.
For Wolfberg, there are three key levels for oil, which he said will be critical heading into next year. "I'm watching that $37.50 and $37.75 level. That was the lows from August and if we are able to hold those lows I think that could put in place a double bottom," said BNP Paribas' head of U.S. cash trading. "If we close below these levels, the bottom of the near-term trend is $35 and $34.50."
Crude oil's slide continued on Monday morning, as oil futures broke below $39 per barrel. And with oil producers unwilling to publicly make moves to reduce the supply of oil, traders don't appear to see crude rising back above $50 per barrel any time soon.
On Monday, the first futures contract that shows oil above $50 expires in the second half of 2017. Crude oil for December 2017 delivery (which is more liquid than other far-in-the-future contracts) is trading at just $50.50 per barrel.
Futures contracts don't reflect pure expectations of where that commodity will trade; they also reflect things like the costs of storing that commodity, the extra price that users will pay to have access to the commodity for convenience reasons, and prevailing interest rates.
Yet the crude oil futures curve clearly reflects expectations that the commodity's plunge below $50 is not a short-term phenomenon.
"The futures curve is telling you that the market is totally oversupplied, and will remain so for a long time," commented Andy Hecht, a commodities trader and the author of How to Make Money with Commodities.
The latest bad news for crude came on Friday, when the Organization of Petroleum Exporting Countries decided to take a "wait and watch" approach to production levels, rather than taking action as oil prices continue to plummet. That spelled bad news for oil bulls who may have been hoping the oil cartel might signal a policy shift.
"In a nutshell, it tells me that it will take a long time to work through the surplus and traders feel prices won't rise significantly for a while," agreed Anthony Grisanti, a New York-based trader with GRZ Energy.
The European Central Bank shocked the world and caused a global sell-off when it announced a smaller-than-expected stimulus package this week. The message from ECB President Mario Draghi sent the euro surging more than 3 percent against the dollar, seeing its best one-day gain in more than five years, a feat that left veteran trader and commodities king Dennis Gartman stunned.
"This is something more than a bounce," Gartman told CNBC's "Futures Now" on Thursday. "I've been trading for 40 years, and anytime you see a four euro move, you have to stand back in absolute awe and in the majesty of that move. It is stunning."
Gartman noted that magnitude of the move was caused by Draghi's hawkish tone. "The ECB caught everyone off guard" by not enhancing the amount of its monthly purchase, he said.
For those wondering what it will take for the market to reach new highs, BlackRock's Russ Koesterich channeled a 1990's Clinton campaign mantra by saying "It's the economy, stupid."
Using the theme of James Carville's famous 1992 campaign quote, Koesterich told CNBC's "Futures Now" on Tuesday that the S&P 500 will continue to trade in this sideways and choppy pattern that we've seen this year until there's "significant evidence of growth" in both the economy and earnings picture.
"The key thing for the U.S. market is that we are already at the top of its valuation range. The S&P 500 is already trading at 19 times forward earnings and there's only so much further that multiple expansion can take us," BlackRock's global chief investment strategist said.
The Federal Reserve now looks set to raise rates in December, partially based on expectation that inflation is set to finally rise to its 2 percent target. There's only one potential problem.
There's actually a way that markets can see where investors think inflation will go. And they do not exactly see eye to eye with America's central bank.
Over the next five years, annual inflation is expected to run at less than 1.3 percent. Even over the next ten, investors are looking for no more than 1.6 percent per year.
The Fed is well aware of this thinking among investors. In fact, the minutes to the Fed's October meeting record that "a couple of members expressed concern about the continued decline in market-based measures of inflation compensation."
To be sure, the comparison here is not apples-to-apples.
The popular market-based measures of inflation referenced above are simply found by comparing the yield on a Treasury bond and a Treasury Inflation-Protected Security (or TIPS) of the same maturity.
Since a TIPS bond pays an investor an amount that varies with the Consumer Price Index (CPI), and a Treasury bond is not adjusted for inflation, the Treasury yield minus the TIPS yield should theoretically produce the market's expectations of inflation. That number is known as a "breakeven rate" (since it is the inflation amount that will make the TIPS investor and the Treasury investor break even with each other).
While the breakeven rate reflects expectations about the more popular CPI inflation rate, the Fed targets the alternative personal consumption expenditures (PCE) metric.
Still, it is the trend in the breakeven rate that the Fed has its eye on, rather than the absolute percentage. And while the PCE and CPI readings may differ from month to month, the measures are almost perfectly correlated over time.
One of the biggest stated concerns for stocks over the past year has been the tightening of monetary policy by the Federal Reserve. But for the famously bullish Tom Lee, those who expect a Fed hike to hit stocks are getting something wrong.
When asked about the potential consequences of a Fed rate hike in December, Lee said: "I think markets are really going to embrace this, and it's going to be quite constructive."
Lee, the former JPMorgan strategist now with boutique research firm Fundstrat Global Advisors, said "equity markets are anxious to really get some clarity from the Fed, and of course we interpret that to mean the Fed to start moving," particularly after so many months of speculation about when the first hike would come.
A December move wouldn't exactly be a shock to the market; to the contrary, "we know fixed income markets and credit have priced in some type of move," Lee said Thursday on CNBC's "Futures Now."
Investors are clearly obsessed with the question of when the Federal Reserve will first raise rates. Yet it's the pace of future increases that could ultimately be more important for risk assets.
Fed presidents James Bullard and Jeffrey Lacker made headlines this week when they told reporters that the any rate hikes after the first one will not necessarily be gradual, and will not be on a predetermined path.
To be fair, they are among the most hawkish members of the Federal Open Markets Committee. Lacker's was the the lone dissent to the Fed's decision not to raise rates in September, and Bullard has said that he would have dissented had he had a vote, which he will in 2016.
Still, the idea that subsequent rate target increases will be gradual no matter when the Fed hikes has become a key part of market speculation. Fed chair Janet Yellen frequently directs attention away from hike number one to the slow hikes beyond it.
Meanwhile, Bullard's and Lacker's comments served to remind investors that if the Fed's actions are truly data-dependent, such vows can really only serve as a forecast.
If inflation finally picks up, as the Fed's hawks expect it will, the central bank would obviously be hard-pressed to increase rates rapidly in order to fulfill its mandate to maintain stable prices — particularly since the "maximum employment" side of its mandate appears to be well-met with job creation on the rise.
But that doesn't prevent the doves from suggesting a promise-heavy policy path.
"It is critically important to me that when we first raise rates the FOMC also strongly and effectively communicates its plan for a gradual path for future rate increases," Chicago Fed president Charlie Evans said in a Thursday speech.
He explained that if the committee failed to provide such guidance, it would be an "important policy error" because it might induce people to believe the Fed "is less inclined to provide the degree of accommodation that I think is appropriate for the timely achievement of our dual mandate objectives."
Whether or not such a belief would be justified is a separate question entirely.
Crude oil is pacing for its worst weekly performance in the last three months as concerns about slowing global growth and a strengthening dollar have commodity traders hitting the sell button. And that has one group of traders very happy: short sellers.
"Open interest increased by 33,000 contacts on [Wednesday], so that's a significant addition of shorts," BNP Paribas' head of U.S. cash equity trading, Darren Wolfberg, said Thursday on CNBC's "Futures Now." Government data released Thursday showed U.S. supplies rose for the seventh straight week.
Wolfberg explained that when open interest rises on a day that an asset is down — crude oil fell 3 percent Wednesday — it means that traders are making new bets that the price will go lower. Conversely, he added that in early October, the increase in open interest was tied to a move higher in crude oil, reflecting more long positions.
"This is actually a good barometer to know the underlying flows of the marketplace," he said. When investors go short, they are betting a security or commodity will fall in value.
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