This program is for macro market quantitative analysis and is provided for informational and educational purposes only and does not constitute investment advice, an offer to buy or sell any security, or a solicitation. The direction of the ETFs mentioned is output from a system quant model and is not personalized investment advice, nor does it take into account individual risk tolerance or financial condition. Investments involve risks, and any decisions should be made after consulting with a licensed investment advisor.

Admitting a fact: last night was clearly a broad market sell-off. SPY fell by 2.58% on the day, and QQQ dropped by 4.80%. In other words, it wasn't just a correction in individual sectors but a decline across core US stock indices.

But what to watch today is not who has fallen the most. Rather, it’s that markets are reaccepting the idea that US interest rates may be higher for longer than originally thought. In plain terms, money isn’t getting any cheaper anytime soon. This will directly impact banks, real estate, small caps, bonds, and even gold and emerging markets, leading to a

Compared to yesterday, the three biggest changes are

First, the view on the banking sector has warmed up. KRE shifted from neutral to slightly positive, and KBE also moved from slightly negative to slightly positive. In plain terms, the market now believes that if short-term interest rates remain high, the spread between deposit and lending rates, or the 'net interest margin', might be more comfortable. The net interest margin can be understood as the difference between a bank's 'cost of goods' and its 'selling price'. A larger gap typically means better profit margins.

Second, the energy sector’s momentum has clearly weakened. XLE shifted from a slightly positive to a slightly negative outlook, and BNO, which is newly included in the analysis, is also decidedly unfavorable. This isn’t because oil demand has suddenly dropped; rather, there are new signals of de-escalation in the Middle East. In simpler terms, the market now believes that the risk of the Strait of Hormuz being blocked is lower than previously thought. Once concerns about supply disruptions ease, the ‘risk premium’ embedded in oil prices will decrease. The risk premium refers to the additional amount investors are willing to pay due to their fear of potential issues.

Third, interest rate-sensitive assets are under more pressure. The negative bias for IYR is clearly rising, and IEF has newly turned slightly negative. Here, a brief explanation of 'duration' would be helpful. Duration can be understood as the sensitivity of bonds to changes in interest rates. The longer the duration, the more typically they fear an increase in interest rates. Therefore, when the market perceives that higher interest rates will persist for a longer period, real estate and mid-duration US Treasuries are more likely to come under pressure.

Storyline One: Rates May Stay Higher for Longer, Who Suffers and Who Benefits?

[未翻译/untranslated] 先说发生了什么。 这条主线的核心触发， 来自“美联储利率路径正发生重大转变！高盛警告”。 再叠加 4 月 PCE 同比 3.8%， 核心 PCE 3.3%。 PCE 是美国常看的通胀指标。 白话讲，就是物价涨得快不快。 核心 PCE 则是去掉波动大的食品和能源。 可以更像“底层体温”。

What do these data indicate? They suggest that inflation is not as compliant as expected. With high inflation, the Fed is unwilling to cut rates too quickly. This 'hawkish signal' means the Fed wants to keep interest rates higher for longer. The market has even revised its expectations of potential rate hikes.

The transmission chain, in simple terms, is as follows: High inflation → The Fed unwilling to cut rates → Higher borrowing costs → Expensive financing for businesses and high housing costs → Pressure on real estate and small companies → Leading to lower valuations for the broader market.

So, this line hits IWM, VOO, IYR, and IEF most directly. IWM represents small-cap stocks, which can be understood as companies that are not as large. They rely more on financing and are more afraid of high interest rates. Therefore, the system is quite certain about a bearish outlook for IWM. Last night, IWM only fell by 0.57%, which doesn't seem as severe at first glance. But this does not change the main trend. The market has not fully followed through in the short term, and the system's rationale remains: under conditions of high interest rates, small-cap stocks face greater financing pressures and valuation pressures.

The same applies to VOO. VOO is basically the market index. The system is quite certain about a bearish outlook for VOO. Last night, VOO dropped by 2.59%, and this tape, or market performance, confirmed the system's judgment. Tape can be understood as the market voting with prices on that day.

IYR is real estate. What does real estate fear the most? It fears high mortgage rates, expensive financing, and compressed project returns. Therefore, the system is quite certain about not being optimistic about IYR. Imagine that developers find it more expensive to borrow money, homebuyers have higher monthly payments, and transactions are likely to slow down. This is why the real estate sector often moves under the pressure of high interest rates.

IEF is for 7 to 10 year Treasuries. As just mentioned, duration reflects sensitivity to interest rates; when rates rise, bond prices typically fall. Therefore, the system is quite certain about a bearish outlook for IEF. Don't be misled by the notion that 'bonds are stable.' Stability depends on the context. If the market is re-pricing towards 'longer and higher,' intermediate-duration bonds will still face pressure.

Who benefits instead? Banks. The logic for KRE and KBE is that higher short-term interest rates could help bank net interest margins, especially for KRE, which went from neutral to slightly positive today, with a strong system assessment. For KBE, the system tends to be bullish but with moderate confidence. Last night, KRE rose by 4.30% and KBE by 3.61%, adding support to this logic. However, it is important to note that the system clearly states that this is still a confirmation rather than a new super catalyst. In other words, the direction is clearer, but it has not yet reached unanimous agreement.

[未翻译/untranslated] 顺手再提一个稳定高信号。 UUP，也就是美元， 系统挺确定地看好。 美元强，白话讲就是 全球资金更愿意先躲到美元里。 一方面因为避险， 另一方面也因为美国利率偏高。 如果美元继续强， 通常会给新兴市场和大宗商品 带来一些外部压力。

Storyline Two: Is the Middle East Less Tense? Insurance Premiums in Oil Prices Are Being Reversed

The second main thread is energy. Here, what matters most is not whether oil prices rose or fell on a particular day. Rather, it is the cooling concern in the market about potential supply disruptions.

The trigger comes from Trump's statement in the Situation Room suggesting a push for 'reopening the Strait of Hormuz' or reaching a temporary MOU. This is combined with multiple news reports indicating that Iran has put forward proposals, negotiations are advancing, and there is an increased possibility of resumed passage through the strait. Such information pieced together would likely cause the market to first retract from the most alarming scenarios.

The Strait of Hormuz is crucial because it functions like a giant tollbooth at sea, with much of the world's energy passing through it. If there are concerns about potential disruptions here, an additional layer of 'what if' insurance in the form of higher oil prices would be factored in. This is the risk premium mentioned earlier. Now, as conflict signals increase, that layer of insurance could easily dissipate.

[未翻译/untranslated] 所以 XLE 的判断 从偏正面翻成偏负面。 系统对 XLE 持负面判断，把握较大。 而且这是今天最清楚的翻转之一。 BNO 也一样， 系统挺确定地不看好 BNO。 BNO 可以理解成 更直接跟着布油走的产品。 如果供应中断概率下降， 它自然更容易承压。

There is a point that many people tend to misunderstand. Some might ask, 'Isn’t the Middle East still unstable? Why isn’t energy performing better?' The market does not simply look at whether there is conflict; it assesses whether such conflicts could further escalate to impact transportation, sanctions, and supply. If the likelihood shifts from 'likely' to 'not necessarily', oil prices would likely correct partially.

XLE fell by 1.84% last night, which aligns with the system's judgment and serves as a validation of this approach. However, it is also true that XLE has risen by 2.45% over the past five days. This indicates that short-term prices are not moving in a straight downward line. The system does not mean to say that XLE will fall every day, but rather that over the next 1 to 3 months, the energy sector is more likely to underperform.

VDE is neutral today. In plain terms, despite both being energy-related, the system's view on VDE is currently divided. Why? Because its internal logic is in conflict. On one hand, a move towards risk reduction would lower energy risk premiums. On the other hand, if sanctions escalate, it could support energy stocks. Both arguments hold water, but no clear winner has emerged yet. Therefore, the system remains on the sidelines for now.

Who else will be affected by this? It will affect GLD. Gold is often considered a safe-haven asset. But today, GLD has returned to neutral from slightly negative. In plain terms, gold has tried to move into a safe-haven position several times recently but has fallen back each time. This indicates that the market has not yet consistently been willing to give gold a higher safe-haven premium. Therefore, the system is currently on hold for GLD. Conversely, IAU remains with a stable high signal, and the system holds a positive judgment on IAU with greater confidence. These two seem contradictory but actually mean: Gold still has a long-term safe-haven support, but in the short term, there hasn't been a particularly smooth or consistent consensus forming yet.

Storyline Three: Risk Appetite is Rising, but Not All Safe-Haven Assets Are Moving Up Together

The third main trend is risk aversion. However, this time it is not a 'one-button rise' across the board. Instead, there is significant. The US dollar, long-term US Treasuries, yen, and defense stocks benefit more clearly, while overseas bonds, emerging markets, and German equities are more likely to be under pressure.

First, the defense sector. ITA is one of the most clear threads in today's system. The system is quite confident about ITA. The logic is straightforward: as long as there is an escalation of geopolitical conflicts, even if it has not yet reached the worst-case scenario, expectations for defense procurement, maintenance, and restocking are likely to rise. Last night, ITA fell by 0.92%, indicating that the market does not fully agree in the short term. However, the system's reasoning remains unchanged because it looks at a period of 1 to 3 months. As long as the conflict thread persists, this expectation for the defense sector will remain.

PPA also falls into this category. The system tends to be bullish on PPA, but with moderate confidence. The reason is that at present, this line is more driven by events and lacks the harder validation of budgets and appropriations. To put it plainly, the story makes sense, but there isn't enough financial evidence for implementation yet.

And about TLT. TLT is a long-duration US Treasury fund. The system has a slightly positive view on TLT, but further observation is needed. Why just 'further observation'? Because risk aversion is indeed rising, but on the other hand, high inflation and high interest rates are also suppressing bond prices. It's like two forces pulling in opposite directions. On one side,

BNDX has shifted from a slightly positive to a divided outlook. Systematic views are divergent. The reasons are quite realistic. When geo-political risks rise, not all bonds become equally popular. Sometimes funds flow more towards US Treasuries rather than foreign investment-grade bonds. Investment-grade bonds can be seen as debt issued by companies or sovereigns with relatively better credit quality. But once topics like European defense spending and risk premiums heat up, foreign bonds may not be any more favored than US bonds.

The pressure on emerging markets (EEM) is more direct. The system has a negative judgment on EEM, with significant caution. The transmission chain goes as follows: high US interest rates -> stronger US dollar -> pressure on emerging market currencies and liquidity -> increased volatility in stock markets. Adding to this, geopolitical uncertainties make the market even less willing to bear risks in regions with high volatility. Here,

EWG, which represents the German stock market, also turned negative today. The system remains cautiously negative on EWG as it continues to monitor developments. This is because Germany's economy is heavily reliant on exports and industry. If energy, shipping, and supply chains are further disrupted by Middle Eastern issues, it would be more susceptible to such impacts. While military orders theoretically could benefit some European companies, over the next 1 to 3 months, this is unlikely to offset the pressures from energy and manufacturing supply chain challenges.

Finally, FXY for the Japanese Yen. The system has a slightly positive outlook on FXY but further observation is needed. One line of reasoning is the expectation of normalization by the BoJ. In plain terms, 'normalization' means moving away from extreme easing. Another line of reasoning is geo-risk aversion. When market tensions rise, the yen often serves as one of the safe-havens. However, current prices and volumes have not yet provided sufficient confirmation, so we can say there is potential but are not particularly certain.

Conclusion

Today's market is pricing in two things simultaneously: higher and longer-lasting US rates, and a less out-of-control Middle East risk. The former is suppressing real estate, small caps, large caps, and mid-range US Treasuries, while also benefiting the dollar and some banks; the latter is weakening support for oil prices and the energy sector.

Over the next 1 to 3 days, there are three key things worth watching. First, new inflation data and any shifts in the Fed's rhetoric. As long as 'hawkish signals' continue, meaning that rates will remain high, the pressure lines for IWM, IYR, and IEF will likely be discussed repeatedly. Second, developments related to the Strait of Hormuz, temporary arrangements, and sanctions progress in the Middle East. This will determine whether XLE, BNO, and VDE continue to face pressure or if a rebound narrative reemerges. Third, where safe haven flows are going. If the dollar and defense sectors strengthen while long bonds lag, it suggests greater concern about geopolitical issues but also fear of inflation and rates. Only if TLT begins to participate would it indicate that traditional safe havens are being more fully embraced by the market.