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Israel’s risk premium falling sharply

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The risk premium in Israel, as reflected in many indicators, has moderated sharply in recent days. This can be seen in the foreign exchange market as well as the bond market. This is a positive trend that indicates a significant change in trend. Just three weeks ago when Israel attacked Iran, the markets feared an escalation of the war and thus there was huge volatility in the Forex market and a rise in government bond spreads compared to US government bonds.

“We see the risk premium in Israel declining through several channels and in an impressive way,” says Modi Shefrier, chief financial markets strategist at Bank Hapoalim. He added, “This result comes because we recently heard about an expected settlement on the northern front. If we reach calm in this region at least, this will affect the markets.”

In the bond market, spreads on US bonds narrowed for both dollar bonds and shekel bonds, reflecting the lower risk premium demanded by investors. If that wasn’t enough, since the beginning of this month, the shekel has been the world’s best-performing currency against the US dollar and the euro. Since the election of Donald Trump as President of the United States, the dollar has risen against a basket of currencies, but not against the shekel.

Another indicator of low risk is the credit default swap (CDS) rate – the cost of insuring against a default on government bonds. 10-year credit default swaps rose after the attack in Iran to a record high of 190 basis points. For comparison, on the eve of the war the figure was only 80 points. Today, it has reached 160 points – a high number, but much lower than at the end of October.

Despite the sharp decline, as seen in credit default swaps, the situation is still far from what it was on the eve of the war. Israeli bond spreads have decreased compared to US bonds, but are still at a level similar to the BBB rating (like Mexico and Peru, for example), while Israel has not yet reached this level in most credit rating agencies. . The shekel also still embodies a certain risk premium due to the war, and according to market estimates, in a “normal” situation it would currently trade at 3.3-3.5 shekels to the dollar and not 3.75 shekels to the dollar.

The other index is the Tel Aviv Stock Exchange (TASE), which has performed well recently compared to other global markets. Over the past month, the Tel Aviv 125 Index rose about 5%, compared to Wall Street’s Standard & Poor’s 500 Index, which rose only 0.5%. Leading European indices generally declined during this period. Therefore, in the stock sector as well, there has been a correction in Israel’s poor performance throughout the last year of the war, although even after the recent gains, the TSE’s performance is still lower than expected according to estimates.







Reasons for optimism

There are two main reasons for optimism in the markets, two main reasons – the 2025 budget moving forward and reports of progress in negotiations on the ceasefire agreement in Lebanon. Shafir says: “The market is looking forward, and if Israel reaches a settlement in the north, the fighting will be less intense in the future and the market hopes for a recovery.”

Markets believe the war is in its final stages, “so optimism is getting stronger,” says Alex Zabyczynski, chief economist at Metaf.

However, when looking at the aggregate data in Israel, it is difficult to see relief. Inflation remains high, at 3.5% in the October index – above the Bank of Israel’s target, and other data also point to weakness in the domestic economy. So why is the market expressing optimism? “This is the opinion of the market, and this is how it looks at the current reality, where the risks to the economy have decreased,” Zabiczynski adds.

Signs of weakness

The inflation figure published at the end of last week matched analysts’ expectations, but was still above the 3% upper limit of the annual inflation target set by the Bank of Israel. According to estimates, the annual inflation rate will reach 4% in 2024.

Moreover, the recently published Central Bureau of Statistics Business Situation Survey showed that optimism for the coming year is declining. According to participants, there appears to be a decline in private consumption, perhaps due to the expected increase in value-added tax and additional measures that will be imposed on the public. Consumer confidence, as reflected in this and other Central Bureau of Statistics surveys in Israel, also remains low.

How can we reconcile the gap between pessimistic data and market optimism? According to Shaffer, they are not necessarily related to each other. “The current situation does not indicate that markets are looking to the future, but rather to tomorrow.”

Zabezhinsky has a similar point of view. He says: “The markets in Israel have not paid attention to local economic data recently. Despite the publication of the Bank of Israel’s composite index, which was very negative, and other economic data that were weak, the market continued its movement slightly.” Positive trend.”

On the positive side, inflation expectations for next year are slightly moderate. According to the latest analyst estimates, inflation in the next 12 months will fall within the Bank of Israel’s target range and will be 2.7%-3%. In this case, the possibility of raising interest rates will likely become unrealistic, although the current reality is particularly volatile due to uncertainty and war.

Published by Globes, Israel Business News – en.globes.co.il – on November 18, 2024.

© Copyright Globes Publisher Itonut (1983) Ltd., 2024.


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