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.

The most important thing to watch today is still the delay in lowering interest rates. In plain terms, the market is repeatedly grappling with the same reality: the Fed is unlikely to ease until inflation pressure has fully subsided. Higher borrowing costs are likely to hit real estate and small companies first; meanwhile, the dollar and some defensive sectors may find more support.

Compared to yesterday, what changes are there?

To sum up, there was no reversal in direction today. In other words, the main themes of the system remain unchanged: one is the situation in the Middle East, and the other is the Fed's interest rate path.

The first change is the absence of new strong evidence. In plain terms, it's not that the story has changed, but rather that the new information isn't hard enough to push the original judgment further.

The second change is that several key trends are beginning to experience a 'partial realization.' In plain terms, this means the market has already moved in one direction for some time, so further movement in the same direction may now be less smooth.

The third change is that short-term prices are somewhat at odds with the medium-term outlook. For example, XLE and IWM showed not weak prices yesterday, but the system still adheres to its original assessment. This means that the market disagrees in the short term, while the system looks one to three months ahead, not just daily fluctuations.

Storyline One: With Interest Rates Remaining High for an Extended Period, Who Will Suffer the Most?

What happened? Around the Fed's 2026 Rate Cycle, or 'how will this round of interest rates play out', the market is still pricing in two types of messages. One is 'Rate Cuts Paused—but Also Off the Table?', which means that not only are rate cuts on hold but they may also be off the table temporarily. The other is the meeting minutes released on May 20, which mentioned a rise in discussions about raising rates and very clear hawkish signals. In plain terms, this means the Fed wants to keep interest rates at high levels.

Why does this affect ETFs? The transmission chain is not complex. High inflation, or market concerns about high inflation, means the Fed is less likely to cut rates; without rate cuts, borrowing costs are higher; higher borrowing costs put pressure on real estate and small companies, as they rely more heavily on financing. Conversely, slightly higher US interest rates often provide more support for the dollar, as global funds find US assets more attractive.

There are three affected ETFs. Starting with IYR, which covers the real estate sector. The system has a negative outlook on IYR, and it is quite confident about this assessment. This logic is straightforward: real estate firms and REITs heavily rely on interest rate conditions; higher rates mean more expensive financing and lower valuations. Yesterday, IYR fell by 1.42%, aligning with the system's prediction in the short term, which can be seen as a tape confirmation of the system's judgment. Here, 'tape' refers to the actual market movements.

Looking at IWM, which represents small-cap stocks. The system is quite bearish on IWM, but it’s important to note that yesterday IWM gained 0.87%, and the market in the short term disagrees with this view. However, the reasons haven’t changed: smaller companies typically have thinner profit margins and rely more heavily on external financing environments. With interest rates at high levels for an extended period, their situations tend to be tougher compared to larger companies. To put it simply, large companies are like adults with ample cash reserves, while small companies are akin to young people still saving up; when interest rates rise, the latter often struggle more to keep up.

Finally, let's look at UUP, the USD Index ETF. The system is quite confident about UUP. The reason is straightforward: if US interest rates are higher and for a longer period, the dollar becomes more attractive to capital flows. Yesterday, UUP only gained 0.04%, which wasn't strong, but it didn't undermine this main trend either.

Storyline Two: The Middle East has not truly cooled down yet; defense and energy should be viewed separately.

[未翻译/untranslated] 发生了什么？ 围绕“美伊 2026 战争”这条线，最新触发事件是“Trump Makes U.S. Troop Deaths Iran Red Line”。白话讲，就是美国对冲突升级画了更清楚的红线。与此同时，消息面里既有伊朗递交结束战争提议，也有航运受攻击、海上封锁、导弹和无人机相关报道。说明什么？说明局势并没有彻底平静，更多像一边试探、一边博弈。

Why does this affect the ETFs? Here is where it gets most confusing. The situation in the Middle East impacts defense and energy differently. For ITA, which covers defense aerospace, the logic is that the more conflicts recur, the higher the likelihood of increased military orders, defense spending expectations, and attention to defense. For XLE, which covers the energy sector, the system remains bearish because it bets not on an immediate resolution but rather on a gradual unwinding of the most extreme supply disruptions and transportation risk premiums in the medium to short term. In plain terms, this means that due to fear of potential issues, prices are artificially inflated.

Now let's look at ITA. The system is slightly positive on ITA, but still needs to be observed. The conviction level isn't particularly high, but the direction hasn't changed. It has already outperformed the broader market by 3.39% within this window, which in plain terms means that the defense sector has already led the way. However, from a historical perspective, defense sectors typically show resilience during such conflict environments. ITA fell by 0.95% yesterday, which goes against the system's assessment, so it needs to be explicitly stated: while the market disagrees in the short term, the system still sees the medium-term effects of the conflict not having disappeared.

Now let's look at XLE. The system is quite confident in its bearish view on XLE. It’s important to note that XLE rose by 1.14% yesterday and has gained 1.80% over the past five days, indicating that the market is currently not accepting this judgment. However, the system's rationale is that earlier increases in energy prices included a significant amount of 'worry premium' due to risks associated with the Strait of Hormuz and transportation lines; if the situation drags on without escalating into full-blown chaos, this worry premium could gradually dissipate, making the energy sector relatively weaker compared to the broader market. Imagine that previously everyone was worried about shortages, driving up oil prices; now, if it turns out that although there is a lot of noise, supplies may not be cut off after all, then prices might fall back down.

Storyline Three: Demand for Safe-Haven Assets Remains, but Long-Term Bond Signals Are Weak

What happened? Recent news still features upgrades and pressure on truce agreements related to the Gaza, Lebanon, and Israel conflict. In other words, geo-political risks have not disappeared and risk aversion continues to be reignited.

Why does this affect ETFs? This would impact TLT, the long-term US Treasury ETF. Long-term US Treasuries, in plain terms, can be understood as very long-dated US government bonds, which are more sensitive to market risk sentiment. Typically, during geopolitical risks, some money flows into treasuries for safety. However, this time the risk-aversion logic is in tug-of-war with the high-interest-rate logic. The risk-aversion tries to push up bond prices, but high interest rates are putting downward pressure on them.

So the system is only slightly positive on TLT, but with limited conviction. This 'limited conviction' is crucial because confidence is only 0.09, meaning it's just an initial signal and not a strong conclusion. While it performed relatively better than SPY in the recent window, TLT itself has still been declining, dropping another 0.52% yesterday. This indicates that the market hasn't formed a very unified risk-averse consensus. In plain terms, everyone knows they should be cautious but is also worried about high interest rates limiting long-term bond gains.

Therefore, the TLT line is more of an observation than today's hardest trend. What is truly harder are the two things mentioned earlier: not rushing to lower interest rates and the divergent impacts of Middle East tensions on defense and energy.

Conclusion

The remains that high interest rate expectations have not subsided and Middle Eastern disturbances persist, so the logic of pressure on real estate, small caps, and energy still holds, while the dollar and defense are relatively more supported; however, long bonds are only weak safe-haven signals.

Over the next 1 to 3 days, focus on three things: first, whether the Fed's stance continues to be ish, which means not cutting rates; second, any new evidence of either a ceasefire or escalation in the Middle East; third, if XLE and IWM continue to diverge from the system's judgment, it will be important to determine whether this is just short-term noise or if the main trend is truly starting to shift.