"Unlike in the past, the attention at many of the meetings we held was mainly on the political situation, Israel’s risk premium, and likely political developments and their effects on the Israeli market. In addition, the question of the identity of the next governor of the Bank of Israel arose at almost every meeting, with some of the people we spoke to seeing the uncertainty about who the next governor will be as raising Israel’s risk premium to some degree," Modi Shafrir, chief financial markets strategist at Bank Hapoalim, writes in his weekly market survey. Shafrir writes at length about meetings with hedge funds in London, and about the concerns he heard from traders about the situation in Israel.

As far as Israel’s risk premium is concerned, half of those with whom Shafrir spoke indicated that Israel’s strong economic data would continue to be the main factor influencing the markets. However, "half of those we spoke to believe that, in the light of the effect of local politics on the economy, Israel should be looked at as a developing market, by contrast with the past decade, in which Israel appeared to the world as having a developed interest rate market in every respect, and, accordingly, these funds say that Israel should have a higher risk premium than in the past."

Shafrir adds that some people wondered why Israel’s risk premium was so low, in the light of the fact that, in March and April, "the market priced in a fair risk premium that fell sharply in accordance with expectations that the sides in the political arena would reach a compromise under the aegis of the president."

Shafrir writes that some traders said that Israel’s risk premium ought to rise because of the fear that its enemies might try to attack at this time.

Nevertheless, the hedge funds in London estimate that, in August and September, things will calm down on the Israeli markets. Shafrir points out that the volatility will be liable to return when the Supreme Court convenes for its hearing on the constitutionality of the recently passed law abolishing the reasonableness standard in judicial review of ministerial and government decisions.

As for the foreign exchange market, Shafrir writes that most of the funds expressed interest in taking a long position on the shekel, with the understanding that the risk premium in the foreign exchange market was very high, and that some had already taken such a position. "Some of the hedge funds estimated that a possible change in trend, for example from a further rise in the risk premium, could lead to a sharp rise in shekel exchange rates" if certain funds start selling off these positions.

Published by Globes, Israel business news - en.globes.co.il - on August 7, 2023.

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