High interest rates weigh on valuations; a thaw in China-U.S. relations bolsters sentiment

On Thursday (2026-09-24) the U.S. stock market was basically treading water: SPY fell 0.08%, QQQ was nearly flat, only down 0.01%; but over the past 5 trading days, SPY is up 0.60% and QQQ up 3.37%. The main theme ETF Radar will discuss today is clear: pressure from elevated interest rates remains, while on the other side the China-U.S. atmosphere has shown signs of easing.

First, look at the hardest line, which is U.S. interest rates. On Thursday U.S. Treasuries were heavily sold, and both the 10-year and 30-year Treasury yields pushed to highs not seen since 2007. Yield can be thought of as a bond’s “rate-of-return tag”; when yields surge, it usually means bond prices are falling. At the same time, four Fed officials spoke one after another. The Philadelphia Fed president said another rate hike might still be needed to curb inflation; the New York Fed president said the U.S. economy is very resilient, but there is still much work to do on inflation; the Cleveland Fed and Richmond Fed also emphasized that price pressures are not over.

Put together, these comments constitute a typical hawkish signal. Plainly speaking, hawkish means the Fed is more willing to keep rates high and may not rule out tightening further. The transmission chain is direct: if inflation can’t be contained, or officials worry it can’t, the Fed won’t rush to ease; high rates mean higher borrowing costs; when borrowing is expensive, the first things that tend to feel the squeeze are housing, commercial real estate, and long-duration assets. Duration, simply put, means assets that return cash slowly and are especially sensitive to interest rates — when rates rise, their valuations are more easily pushed down.

This chain quickly fed into real estate news. U.S. new home sales rebounded 6.4% in August, which on the surface looks like a recovery, but the underlying conditions are not easy. Developers are having to rely on lower prices, more incentives, and more "affordability engineering" to bring buyers back. Put bluntly, houses haven’t suddenly become easy to sell; developers need to offer concessions to pull buyers off the sidelines. Supply still stands at 8.5 months, indicating inventory remains ample and absorption pressure hasn’t disappeared.

Viewed together, the picture is complete. On one side rates remain high; on the other, real estate is being propped up by price cuts and promotions. The chain is: high rates make mortgages expensive; expensive mortgages make buyers more hesitant; buyer hesitation forces developers to cut prices and offer incentives; developers’ profits thin, and real-estate-related assets are more easily pressured. So what the market really fears today is not just bond declines, but the high-rate blade continuing to cut into housing and other financing-dependent industries.

At the same time, similar tones came from the U.K. The Bank of England deputy governor warned that if the war drags on, more rate hikes may be necessary. The logic is straightforward: a prolonged war tends to push energy and transport costs up, making inflation stickier. Stickiness, plainly, means prices aren’t easy to bring down. U.K. growth is slowing, which creates the worst combination: a weak economy while rates can’t be easily eased. Although the main storyline today is still the U.S., such messages reinforce global-market worries that rates will stay higher for longer.

However, today wasn’t all tension. Another very new development is that Trump and Xi extended the trade truce at the start of the visit, and the White House held a welcome state dinner in the evening. This action at least indicates that, in the short term, both sides don’t want to immediately escalate confrontation. A trade truce, plainly speaking, presses pause to prevent tariffs and restrictions from escalating further. Why does the market care? Because as long as frictions don’t suddenly intensify, cross-border supply chains, tech hardware, logistics, and even corporate investment sentiment can breathe a bit easier.

But look one layer deeper. Almost simultaneously, political pressure emerged domestically in the U.S. against tax incentives for data centers, with some senators seeking to exclude data centers from Opportunity Zones. Opportunity Zones can be understood as tax-discounted areas originally meant to attract investment to certain regions. Over the past year many viewed them as a tailwind for data-center expansion. Now public opinion and political attitudes have shifted somewhat. That means a short-term easing in China-U.S. relations does not equal an end to domestic political battles over tech infrastructure. In other words, external frictions have eased for now, but internal policy tug-of-wars continue.

So today’s main theme can be condensed into one sentence: high-rate pressure is the real blade, and China-U.S. easing is an emotional cushion. One cuts valuations, the other props up sentiment. The market is being pulled by these two forces simultaneously.

Next, let’s look at a few ETFs you’re more familiar with.

First, TLT, the U.S. long-term Treasury ETF. TLT actually fell 2.89% over the past 5 trading days. And the ETF Radar model is biased negative on TLT for the next 1 to 3 months, with fairly consistent signals. The reasons are mainly three quantitative readings. First, the U.S. 10-year Treasury yield is 5.11%. This is the long-term risk-free rate — plainly, the price the market sets for long-term borrowing; the higher it is, the worse off existing bonds are. Second, the market-implied federal funds rate path is 4.055%. This number can be understood as the policy-rate level the futures market is betting on, indicating the market has not priced in a rapid, large cut. Third, CFTC data show 30-year Treasury futures net short is -211,735 contracts. Net short, simply put, is large participants’ bearish positions minus bullish ones, leaving net bearish exposure. In addition, since September 18, TLT has seen net outflows of $1.711 billion, accounting for 3.78% of assets, indicating funds are also withdrawing. Thursday’s news aligns with this assessment and serves as another short-term validation.

Next, VNQ, the U.S. real estate ETF. VNQ actually fell 2.81% over the past 5 trading days. Looking forward, ETF Radar is biased negative on VNQ for the next 1 to 3 months, with multiple pieces of evidence aligned. First, the U.S. 10-year Treasury yield is still 5.11%; second, the 30-year mortgage rate is 7.03%. Mortgage rates are the interest on home loans — the higher they are, the heavier the barrier to buying a house. Third, VNQ’s cumulative excess return versus SPY is -6.17%. Excess return, plainly, means it has underperformed the broader market by 6.17%, showing persistent underperformance. In addition, FINRA short positions stand at 7,428,217 shares, up 28.4% from the prior period, indicating growing bearish positioning. Today’s new-home-sales rebound that relies on price cuts and promotions is consistent with VNQ’s medium-term pressure: sales can occur, but profits and valuations may not look attractive.

Third, UUP, the dollar ETF. The actual 5-day move for UUP wasn’t separately provided in the input, so only qualitative description is possible here. For the outlook, ETF Radar is biased positive on UUP for the next 1 to 3 months, with fairly consistent signals. The quantitative evidence mainly includes three items. First, the market-implied federal funds rate is 4.055%; second, the U.S. 2-year Treasury yield is 4.71%; third, the U.S. 10-year Treasury yield is 5.11%. Together these represent a dollar interest-rate differential advantage. Interest-rate advantage, plainly, means the same cash earns higher interest in dollar assets, which more easily attracts capital. Also, UUP has seen net inflows of $84 million since September 7, accounting for 20.99% of assets, showing strong short-term fund chasing. One caveat: today’s China-U.S. easing is sentiment-positive and could be risk-asset friendly, which is not necessarily bullish for the dollar; but the model looks more at the medium term and focuses on high-rate support, which explains the divergence between the news-driven easing and the system’s still-dollar-strong view.

Fourth, KWEB, the China internet ETF. KWEB actually rose 1.19% over the past 5 trading days. But for the next 1 to 3 months, the model reads KWEB as biased negative, with fairly consistent signals. Here we must highlight a divergence: it gained in the past 5 days, but the model focuses on the next 1 to 3 months, and a recent rebound hasn’t changed the medium-term pressure. Several quantitative pieces of evidence are key. First, RMB new loans in August increased by only 0.06 trillion yuan for the month, i.e., 60 billion yuan; second, loan-year-on-year growth at the end of August slowed to 4.9%; third, government bond net financing in August was about 1.01 trillion yuan, accounting for more than 60% of that month’s total social financing. Social financing can be understood as the total pool of financing in the economy; a high government-debt share plainly means newly created money flows more toward the government side and less to households and private firms. For internet platforms, this will squeeze consumption and advertising demand. On the positioning side, KWEB has seen net outflows of $169 million since September 7, about 3.57% of assets; options put-call volatility ratio is around 1.71, meaning more people are buying downside protection. Although today’s China-U.S. easing is sentiment-positive, the system stance remains medium-term cautious, believing the weak credit transmission problem is unresolved, so a clear divergence persists here as well.

Putting these four ETFs together looks like a microcosm of today’s market: TLT and VNQ reflect the direct pressure from high rates; UUP reflects the dollar advantage that comes with high rates; KWEB reminds us that diplomatic easing in the short term does not mean China internet fundamentals immediately recover. The news is fresh, the system stance is medium-term — the divergence itself is today’s most informative feature.

The main theme today ultimately comes down to this sentence: rates determine valuations, easing in relations determines sentiment, and right now the force from the rates hand is stronger. Reminder: the above are system quantitative model directional predictions for the general market and do not constitute personal investment advice; please consult a licensed investment advisor before investing.