Days after the U.S. Federal Reserve has made its intentions clear to raise interest rates before a major U.S. presidential election, Felix Zulauf, out with research Friday, says the commodity rally is over and a correction has begun.

Zulauf: Fed rate hike will create counter trends that will have varying degrees of force behind the momentum

The Fed has clearly made known its intention to normalize interest rates, first in the recently released Fed minutes and later with Fed member comments calling for a rate hike soon.

The notion that the Federal Open Market Committee is sending a message that U.S. interest rates will run counter trend to that of other major trading partners is a major wave that will be felt around the world in various markets.

At issue is headline CPI inflation which previewed its largest monthly gain in April, and year-over-year CPI is now up to 1.1%. Core inflation, which rose 0.2% to 2.1%, up for the last 12 months, is now in its 6th straight month above the Fed’s target level, the report noted.

The question is not if the Fed will raise rates, but when. That when might not be June, as the much heralded Brexit vote is on June 23. Given this, Zulauf has his sights set on the July 26/27 meeting. Separate analysis indicates they might have a non-scheduled press conference in its future. Zulauf thinks markets have already started to discount the notion of rate hikes to various degrees.

When interest rates are changing, it creates triggers in other market valuation formulas. Bond prices drop in value as interest rates rise is the most obvious direct correlation. Perhaps among the more immediate reactions occurs in the currency markets. The U.S. dollar is likely to continue its firming trend against “virtually all other currencies.” This is important on several levels, not the least of which is the U.S. dollar’s role as the world reserve currency of choice used to trade commodities.

Zulauf: Commodity rally over along with stocks

In regards to commodities, Zulauf thinks the game is over and the medium-term correction has begun. Here Zulauf has nuanced thoughts:

Commodity prices rallied strongly after a four-year decline, and so did emerging market currencies. Bond yields jumped briefly, and quality spreads narrowed while global equity markets recovered. Was this a turn for the better or simply a temporary interlude before former trends resume?

Looking at commodities it is difficult not to factor in China. At times the puzzle pieces don’t fit, he notes. When the commodity complex made what looked like a good cyclical and technical bottom, it could be China that disrupts what appears as such a logical bull move.

Zulauf says the rally off the low was about repositioning, with the primary performance driver being a belief China was back on a solid growth track and the US would abstain from normalizing interest rates. All told, this created a powerful rally.

Unlike the mind-numbing impact of quantitative stimulus, raising high end asset prices like a hot air balloonist uplifting acrophobic passengers along with adventure seekers at the same pace, the way down is likely to be nuanced with varied correlations.

Base metals are “quite weak” and this rally has been aborted. This comes as crude oil continues to climb on neutral sentiment due to supply disruptions in Nigeria and Canada. The gold correction, however, is likely to be shallow in a world of zero or negative interest rates. Its role as an alternative currency will continue to rise amid “continued verbal attacks by authorities and their advisors makes it a precious asset outside the credit system.”

In addition to the Fed rate hikes ending the commodities rally, Zulauf says this is also the end to the stock market rally. “Global equity markets have very little upside left and the rally off the February lows is beginning to fade,” with the expectation of a decline occurring “well into the summer months.”