In recent days, the financial markets in Israel have behaved as if they know something that we do not know. As rumors of a ceasefire grow, the shekel grows stronger, and stock market gains point to hopes far beyond an end to the fighting in Gaza. Market sources are optimistic about broader regional moves, including the possibility of renewed talks with Saudi Arabia, which could transform the Middle East.
In the past five trading days, while US stock markets have been falling, the Tel Aviv Stock Exchange (TASE) has been rising on most days. In addition, the dollar rose sharply against the world’s major currencies, but the shekel is one of the few currencies that showed a positive return against the US currency. In fact, apart from the ruble, the shekel has been the world’s strongest currency in terms of recent gains.
Risks remain despite recent good performance
Over the past few months, hopes for a ceasefire agreement for the hostages have repeatedly risen, but have been dashed time and again. Therefore, the market reaction was nervous and highly volatile. As the talks progressed, the Tokyo Stock Exchange index rose and the shekel strengthened. When talks broke down, we often saw the opposite trend.
In the current session of talks, things are a little different. As of Tuesday morning, fluctuations in the shekel and the stock market were moderate. Just when it seemed that the talks were in their final stages, the shekel rose more than 1% against the dollar and the Tokyo Stock Exchange rose by the same amount.
Why? This time, the Israeli economy arrives at this moment from a stronger position. The last quarter of 2024 brought with it a record performance on the TASE that surpassed even the leading indexes on Wall Street, and the shekel rose to 3.62 shekels to the dollar – much stronger than before the war. However, a look at the yield spreads on dollar-denominated government bonds and the CDS index reminds us that the risks are not yet completely over. The risk premium has indeed fallen, but it is still very high compared to what it was before the war.
One market trader told Globes that the reason behind the current shekel’s appreciation is indeed the impending ceasefire agreement, but he is less optimistic. According to him, investors around the world are pricing in several steps forward, such as political changes in Israel or a possible agreement with Saudi Arabia. “There are many articles published in Bloomberg about the supposed renewal of contacts with Saudi Arabia, so the market is running with dreams of a new Middle East. In my opinion, foreigners have difficulty understanding the geopolitical situation, and do not take into account the constitutional story that will tear the country apart in 2023.” “.
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Mutual funds CEO and CIO Yudav Kostica agrees that market optimism stems from broader expectations than just reaching an agreement with Hamas. “The last few months have been very positive for the Israeli capital market, which has been able to achieve significant excess returns compared to the world, both in the stock market and the bond market. This is due to the military success in Lebanon,” he says. And the subsequent ceasefire, the fall of Assad and the election of Trump, we estimate that the positive trend will continue due to the emerging (Hamas) deal, which could provide a tailwind for the Israeli stock market, which may continue to outperform Europe and Europe. “In addition, it can be assumed that the shekel, which has been one of the strongest currencies in the world in recent months, will continue to strengthen, especially if we see the Abraham Accords expanding.”
“It is not certain that we will see sharp increases.”
“In the nature of things and according to past experience, nothing is done until it is done and the market is aware of it,” Ronen Menachem, chief economist at Mizrahi-Tefahot Bank, tells Globes. “For this reason, and due to the fact that this is not a sudden event, but an accumulation process.” For a fairly long period, the market will not necessarily react to sharp or sustained price increases when they occur, as the event will likely be accompanied by higher than normal volatility – both before and after.”
Moreover, Menachem asserts that “past experience shows that executing one step unfortunately does not guarantee that the next steps will continue to be implemented. It will likely be a very tense and nervous period, with a lot of media hype in every direction, and I think the markets will react accordingly, let’s say.” If the exchange rate falls below 3.5 shekels/dollar, it will be possible to attribute this to the effect of the deal.”
Menachem emphasizes that markets traditionally do not react only to geopolitical events in Israel, “because the agreement, which is expected to enter into force soon, is taking place close to a major event in the capital markets – the entry of President-elect Trump into the White House.” The White House in exactly one week.” Donald Trump’s return to the presidency is what fueled the steps toward reaching an agreement with Hamas. The president-elect has said several times that if an agreement is not reached, Gaza will go through “hell.”
The higher risk premium will be moderate
“The market seems to believe that the ceasefire that will be signed (temporary, for now) will lead, under pressure from the Trump administration, to a possible end to the war,” explains Modi Shefrier, chief financial markets strategist at Bank Hapoalim. in Gaza, and thus also to a greater decline in the Israeli risk premium.”
Shafir points out that the Israeli risk premium remains at high levels: “The Israeli risk premium has actually fallen sharply since the beginning of November (contrary to expectations at the time for an end to the war in Lebanon), but it remains high – internationally.” In the market, Israeli bonds are still trading similarly to companies with a BBB minus credit rating.
In other words, the risk premium demanded by foreign investors on Israeli government bonds traded in dollars remains very high, on par with countries like Hungary or Peru.
The local market will benefit in the long term
While the markets’ immediate reaction to the agreement may be moderate, the long-term outlook is much more optimistic. Menachem points to the inherent advantages of the Israeli economy that are expected to return to center stage when the political horizon becomes clearer: “The fundamentals of the Israeli economy, the high level of development that characterizes many of its sectors, and the impressive growth over time.” Responsible monetary policy that is consistent with the thinking of credit rating agencies, all of these things are in the interest of the economy.”
The latest forecasts, including those of the Bank of Israel, indicate a recovery in growth over the next two years, along with an expected rise in the value of the shekel that will create additional value for foreign investors. “I expect foreign investors to return to real and financial markets,” Menachem says, adding that “the alternatives abroad, especially in Europe, are not exciting today.” But he stresses that legal clarity and political stability are important conditions for a quick return to investors – “and this is still awaiting the proof stage.”
Shaffer reinforces these optimistic assessments. “If the temporary ceasefire does indeed end the war, we will likely see a significant increase in the amount of foreign investment in Israel in the coming year – especially in high-tech sectors,” he says. Schaffrer estimates that the Tokyo Stock Exchange is also expected to benefit from the negotiated deal, although he notes that the stock exchange’s risk premium has already declined significantly in the last quarter of 2024, and the market will also be affected by global developments.
Published by Globes, Israel Business News – en.globes.co.il – on January 15, 2025.
© Copyright Globes Publisher Itonut (1983) Ltd., 2025.
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