Evening Note: Never a Dull Moment!

 "Never a dull moment" is an understatement these days!

In our weekend rundown I hinted that we're exploring hedging some our non-US exposure based on the prospects for central banks tightening policy and the attendant market implications of such a move.

Here's that paragraph:

"We are also evaluating modest put hedge additions — defined-cost downside protection on both the broader US equity index and a portion of our European and Japanese equity exposure. The inflation data this week argues that the Fed's (as well as the European Central Bank's and the Bank of Japan's) path is narrower than markets have assumed, and a policy misstep in either direction carries real market consequences."

Per my internal morning note below, we haven't yet added those additional non-us hedges, although we did go ahead and reduce our Japan equity exposure a bit, as I alluded to in the last line:

"5/18/2026
Pausing on the Europe hedge this morning, as European equities are catching a strong bid on upbeat news from Iran on negotiations… US equities are just better than flat, Japan is flat (interestingly)... A bilateral pause would likely spark a strong rally right here… UK is up nearly 2% on an official suggesting that they not be hasty on raising rates.

Despite my worries that the ECB may hike into a weakening economy, the initial dip in oil on an opening of the strait will likely see a serious equity rally and possibly a rethink by the ECB in terms of Europe’s inflation prospects.

Japan is another proposition altogether... Although the same narrative may apply, it's definitely not showing up in this morning’s price action (slightly down as I type, while FEZ is up 1.42%, SPX up 0.19%... Japan is wrestling with yields at multi-decade highs; I’m guessing the market sees them less willing to respond to perceived disinflationary pressures of a reopening…. Thinking about simply dumping SCJ, which reduces our direct Japan equity exposure by a quarter."

After giving you today's market rundown, the following synopsis* features what's being said on both sides of the US/Iran conflict. 

Markets in Two Minds

Monday's tape captured a market trying to hold two stories in its head at once, and not entirely succeeding. The S&P 500 closed essentially flat, the Dow eked out a small gain, and the Nasdaq slipped half a percent — but underneath those quiet numbers, technology shares fell more than two percent intraday before recovering, the Russell 2000 lagged again, and the bond market continued the move that has come to define the past several weeks. The ten-year Treasury yield reached its highest level since the start of last year, and the thirty-year sits at levels we haven't seen since 2007. Traders have now fully removed any expectation of Federal Reserve rate cuts this year and are beginning to price in the possibility of a rate hike before year-end. This is the conversation the bond market is having, and it is the one equities will eventually have to reckon with.

The Iran situation continues to drive the macro tone, and today brought a more layered picture than the headlines suggested. Over the weekend, a drone strike targeted the United Arab Emirates' Barakah nuclear power plant — a meaningful escalation in a conflict whose gray-zone character keeps testing the ceasefire that has technically been in place since April. At the same time, the diplomatic track moved forward in ways worth noting. The United States and Iran exchanged revised proposals through Pakistani mediators, and reporting today identified three areas where Washington has softened its position: a partial release of frozen Iranian funds, more flexibility on civilian nuclear activity under international supervision, and a temporary waiver of oil sanctions during the negotiation period. Iran has not accepted the terms, and Washington publicly described the latest exchange as falling short, but the architecture of a phased agreement — first ending the war and reopening the Strait of Hormuz, with the harder nuclear questions deferred to later rounds — is now on the table in a way it was not a few weeks ago.

We continue to view a protracted, slow-grind outcome as the most likely path, with stagflationary pressures keeping the Federal Reserve sidelined and energy markets sensitive to every headline. But the probability of a more constructive resolution has improved at the margin. Portfolios remain positioned for the base case while retaining exposure to a faster resolution if one emerges. We will be paying close attention to the administration's national security meeting scheduled for Tuesday, Nvidia's earnings and the release of the Federal Reserve's meeting minutes on Wednesday, and Walmart's results on Thursday — each of which will tell us something about how the consumer, the corporate sector, and policymakers are absorbing the current environment.

This note is for informational purposes and is not a solicitation to buy or sell any security. Past performance is not indicative of future results. 

*Prepared by Marty Mazorra, Chief Investment Officer, Private Wealth Advisors. Research synthesis and drafting assisted by AI tools under advisor review. All market views, analysis, and recommendations are those of the advisor.