The financial markets in Israel have in recent days been behaving as if they know something we don’t. As rumors of a ceasefire grow, the shekel is strengthening, and the stock market gains suggest hopes that go 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 the US stock markets have been falling, the Tel Aviv Stock Exchange (TASE) has risen on most days. In addition, the dollar has strengthened sharply against the world's major currencies, but the shekel is one of few currencies to show a positive return against US currency. In fact, apart from the ruble, the shekel has been the world's strongest currency in terms of recent gains.
The risks are still there despite recent good performance
Over the past few months, hopes of a hostage-ceasefire deal have risen time and time again, only to be dashed again and again. So, the market reacted with nervousness and strong volatility. As the talks progressed, the TASE rose and the shekel strengthened. When the talks broke down, we often saw the opposite trend.
In the current cycle of talks, it is a bit different. Until Tuesday morning, the fluctuations in the shekel and the stock market were moderate. Only when it seemed that the talks were in the final stages did the shekel strengthen by more than a percent against the dollar and TASE rose by a similar amount.
Why? This time, the Israeli economy is reaching this moment from a stronger position. The last quarter of 2024 brought with it record TASE performances that surpassed even the leading indices on Wall Street, and the shekel strengthened to NIS 3.62/$ - significantly stronger than before the war. However, a look at the yield spreads on government bonds traded in dollars and the CDS index reminds us that the risks have not yet completely passed. The risk premium has indeed fallen, but it is still very high compared with before the war.
A market trader told "Globes" that the trigger for the current shekel appreciation is indeed the imminent 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 several 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 are having a hard time understanding the geopolitical situation, and are not taking into account the constitutional story that tore the country apart in 2023."
More Mutual Funds CEO and CIO Yotav Costica agrees that the market optimism stems from expectations that are broader than a deal with Hamas. He says, "The last few months have been very positive for the Israeli capital market, which has managed to deliver significant excess returns relative to the world, both in the stock market and the bonds market. This was due to the military success in Lebanon 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 the US. 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's not certain we'll see sharp increases"
Ronen Menachem, chief economist at Mizrahi Tefahot Bank, tells Globes, "By the nature of things and according to past experience, nothing is done until it's done and the market is aware of it. For this reason, and given the fact that this is not a sudden event, but a process that had a fairly long build-up, the market will not necessarily react with sharp or sustained price increases when it occurs. It's more likely that the event will be accompanied by higher-than-usual volatility - before and after it."
Moreover, Menachem stresses, "Past experience shows that implementing one step unfortunately does not guarantee continued implementation of the following steps. It's probably going to be a very tense and nervous period, with a lot of media noise in every direction, and I think the markets will react accordingly. Let's say that if the exchange rate drops below NIS 3.5/$, it will be possible to attribute this to the impact of the deal."
Menachem emphasizes that markets traditionally do not react only to geopolitical events in Israel, "Because the agreement, which is expected to be implemented soon, is taking place close to a major event in the capital markets - the entry of President-elect Trump into the White House in exactly one week." Donald Trump's return to the presidency is what fueled the steps towards a deal with Hamas. The president-elect has said several times that if an agreement is not reached, Gaza will experience "hell."
The high risk premium will moderate
Modi Shafrir, chief financial markets strategist at Bank Hapoalim, explains "The market seems to believe that the ceasefire that will be signed (temporary, for the time being) will lead, under pressure from the Trump administration, to a possible end to the war in Gaza, and hence also to a more significant decrease in Israel's risk premium."
Shafrir notes that Israel's risk premium is still at high levels: "Israel's risk premium has already fallen sharply since the beginning of November (against expectations at the time for an end to the war in Lebanon), but it is still high - on the international market, Israel's bonds are still traded similarly to companies with a BBB minus rating."
In other words, the risk premium demanded by foreign investors on Israeli government bonds traded in dollars is still very high, on par with countries like Hungary or Peru.
The local market will benefit in the long term
While the immediate reaction of the markets to the agreement may be moderate, the long-term forecasts are much more optimistic. Menachem points to the inherent advantages of the Israeli economy that are expected to return to center stage as the political horizon becomes clearer: "The fundamentals of the Israeli economy, the high level of sophistication that characterizes many of its sectors, the impressive growth over time, and the responsible monetary policy that synchronizes with the thinking of the credit rating agencies - all of these work to the benefit of the economy."
The latest forecasts, including those of the Bank of Israel, indicate a recovery in growth over the next two years, alongside an expected strengthening of the shekel that will create additional value for foreign investors. "I expect foreign investors to return to both the real and financial markets," says Menachem, adding that "the alternatives abroad, especially in Europe, are not exciting today." However, he stresses that legal clarity and political stabilization are important conditions for a quick return of investors - "and this is still awaiting the proof stage."
Shafrir reinforces these optimistic assessments. "If the temporary ceasefire does indeed lead to an end to the war, it is likely that we will see a significant increase in the volume of foreign investments in Israel in the coming year - especially in the high-tech sectors," he says. Shafrir estimates that the TASE is also expected to benefit from the deal being negotiated, although he mentions that the TASE risk premium already fell 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.
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