The beginning of the implementation of the deal for the release of Israeli hostages held in the Gaza Strip has injected investors with optimism, leading to a rise of just over 1% in the leading Tel Aviv Stock Exchange indices yesterday, in a continuation of the positive trend on the exchange of the past few weeks. The market expects that the deal with Hamas, if it leads to a long-term calming of the security situation, will prove good for the local economy.
"Developments surrounding the deal are going to be a long story. We’re talking about 42 days, six weeks, and it’s impossible to know how things will go during that time. There will be a great deal of volatility on the local market, in addition to the volatility on overseas markets, arising from, among other things, the entry of president elect Donald Trump to the White House," Meitav Investment House founder and director Zvi Stepak told "Globes".
Stepak identifies a positive trend in the Israeli stock market. "The market’s direction looks positive, as I estimated a few weeks ago. The Tel Aviv Stock Exchange looks cheaper than other markets, with improving financial results for the companies traded on it. I assume that we’ll see this in the results for the fourth quarter of 2024 as well.
"If the deal materializes and the second part of it also goes ahead, and we see an end to the war and the release of all the hostages, this will support a continued trend of rises on the stock exchange," said another market source. "My impression is that Trump is about to take up the matter strongly and bring his weight to bear on both sides."
Market sources also say that progress on the deal will lower Israel’s risk level in investors’ eyes, "from which it will be a short step to a lower risk premium, further strengthening of the shekel, moderating bond yields, and rises on the local stock market."
Sticking to the optimistic geo-political scenario, analysts estimate that we shall see the shekel strengthening further against the US dollar. Last year, the shekel strengthened against the dollar by 4%, with a considerable part of that coming in the last week, as progress was reported on the hostage deal. On January 19, 2023, the shekel-dollar exchange rate was NIS 3.74/$. On Friday, the representative exchange rate was set at NIS 3.60/$. There was no foreign exchange trading yesterday, but derivatives trading indicated further strengthening of the shekel to NIS 3.57/$. In this morning’s trading, the rate is currently at NIS 3.5764/$.
Inflation and interest rates
Bank Hapoalim released an economic survey yesterday entitled "An Entire People Waits for the Hostages." The bank’s analysts describe the steep inflation of the past year: "The rise in the prices of food products meets us every day in the supermarket, and we become excessively conscious of it. That feeling is not unique to Israel. It may be, however, that there are significant gaps between the rise in day to day costs of maintaining a household (without raising the standard of living) and the rise in the Consumer Price Index." The bank says that public sentiment about day to day expenses will eventually lead to a slowdown in consumption.
The bank estimates that the Consumer Price Index reading for January, due to be released in mid-February, will be high, because of a wave of policy-based rises in arnona (local property tax), electricity, and water, and the 1% rise in the rate of VAT. The bank sees the index rising by 0.5%. If that is borne out, it will bring the twelve-month inflation rate to 4%.
In February and March, however, the rise in the Consumer Price Index is expected to moderate. If that happens, it will make it easier for the Bank of Israel to bring forward a cut in its interest rate. The rate is currently 4.75%, and the assessment on the market is that the Bank of Israel will start to reduce it in the second half of this year. If it does so earlier, and makes two or three interest rate cuts, then the rate can be expected to be 4% by the end of the year.
Published by Globes, Israel business news - en.globes.co.il - on January 20, 2025.
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