Morning Note: Very Messy Under the Surface -- And -- On Stocks and Interest Rates

What was looking like a decent start to the month for global equities in the premarket, got sideswiped by newsflashes like the following:

"Iran Halts Indirect Talks With U.S. Over Lebanon and Gaza Ceasefire Violations - Tasnim News

• Iranian negotiation team to stop dialogue and text exchanges through intermediaries
•  Move follows alleged violations of ceasefire conditions, including in Lebanon
•  Iranian officials demand immediate halt to Israeli operations in Gaza and Lebanon
•  Iran also demands full Israeli withdrawal from occupied areas in Lebanon before talks resume
•  Iran and resistance front reportedly resolved to fully block the Strait of Hormuz
•  Other fronts, including the Bab al-Mandeb Strait, could also be activated in response"

Yes, markets remain focused on the Iran conflict, despite the major indices floating around their all-time highs... Like I said yesterday (below), the underlying dynamic suggests the market has grown skeptical of resolution prospects:

"... a solid, durable resolution would initially be bullish for virtually all things equities, save, initially, for the energy related.

Thing is, while the S&P had an impressive May (+5%), 7 of 11 key US equity sectors actually lost money during the month... And, of the 4 that were positive, tech (top green line below) -- on earnings and hype -- did 80% of the lifting... I.e., without its heavy concentration in the tech sector, the S&P would've lost money in May!  That's not the broad-based rip-your-face-off-rally you'd expect in an all's clear scenario:"

This morning just continues that theme... I.e., the S&P is nearly flat, but that's due entirely to tech and energy (oil prices are rising on those headlines)... Financials are just slightly off (they ultimately like higher interest rates [if the fed stays contained]), the remaining 8 sectors are getting hammered (down 0.8% to down 1.8%) so far this morning.

Gold, not to mention, is also (on rising interest rates, and dollar) taking a hit -- down nearly 2% as I type.

Looking beyond the immediate, a friend sent me an article about the relationship between interest rates and the stock market. I didn't entirely disagree with the author's point, but found it lacking on a few fronts... I think my reply (below) is instructive and timely given present circumstances:

"So, just a few thoughts.

Absolutely stocks and interest rate rates can rise at the same time, all depends on the conditions and the reasons. Will happen early in an expansion as both come off the bottom.

It’ll happen during rapid growth phases as earnings keep up. Although the market’s going to be much more selective at that point.

Certain sectors will benefit from rising rates, particularly if the long end rises faster. That’s good for financials. The signal there is that the Fed is going to suppress the short end, keeping the yield curve steep.

And of course, concentration in certain sectors in the indices can give the illusion that stocks are doing well as interest rates rise. For example, over the past month S&P rose 5%, but seven of the sectors actually went down. Tech was the lion’s share of the gain. And that was about earnings, and the hyping of a few companies.

I would also argue that the current scenario is largely a result of the market anticipating a near-term resolution to the Iran situation. Traders are anticipating rates will back off, as they expect oil prices will rapidly retreat. Of course that’s very debatable when you look at depleted inventories, depleted strategic reserves, the message sent about energy security, and, thus, the likelihood that there is going to be a tremendous amount of strategic purchasing in the coming months. 

I think there’s a real risk that as the market realizes that higher rates are likely here to stay, and that inflation has little sustainable chance of getting back to something around 2% stocks begin to struggle."

Stay tuned...