Israeli Stocks Brace for Opening Amid Geopolitical Tensions and Oil Surge
The Tel Aviv Stock Exchange is expected to open with a mixed outlook, influenced by a significant rise in oil prices above $91 a barrel and a 3% jump in the VIX volatility index, alongside escalating US-Iran military tensions. Despite geopolitical instability and inflation concerns, dual-listed Israeli stocks are anticipated to provide a stabilizing effect, returning without a strong directional bias. The TA-35 index saw a slight negative arbitrage gap of -0.02%, with offsetting influences from major stocks like Elbit Systems and Palo Alto. Yesterday, the TA-35 closed down 0.7% and the TA-90 down 0.2% amid Middle East tensions and Wall Street declines.
Over the past month, the Tel Aviv market experienced modest declines, with the TA-35 down 0.2% and TA-90 down 1%. However, sector performance varied significantly, with financial stocks rising 6-11% driven by quarterly reports, while defense stocks dropped around 15%. Elbit Systems and Next Vision fell about 12%, and military simulator company Bagira, which IPO'd in early June, plunged 17%. The technology index lost over 6%, and clean energy stocks fell nearly 10%. Qualitao, Electra Real Estate, and Eretz Industries dropped over 25%, while Matrix, El Al, and Ayalon surged by similar amounts.
Bond markets are showing rising yields on Israeli government bonds, with the Tel-Gov Bond index up and its yield climbing to 4.15%. This trend is attributed to uncertainty surrounding US interest rate policy, potential dollar strengthening, and increased inflation pressures in Israel. The 5% yield on US bonds also presents a more attractive alternative for foreign investors. The yield curve has steepened, with medium and long-term yields rising, reflecting a higher risk premium for longer durations. US bond markets are also under pressure, with 10-year yields reaching approximately 4.76% and 30-year yields at 5.26%, exacerbated by the US Treasury Secretary's announcement of delays in fiscal plans to reduce the deficit.
In commodity and currency markets, the Israeli Shekel saw a slight strengthening against the dollar, trading at 2.986 shekels. Oil prices continue to climb, rising about 1% to over $91 a barrel, driven by direct military confrontations between the US and Iran in the Strait of Hormuz and explicit threats from President Trump. Analysts predict that periodic risk premiums will continue to push oil prices higher, with supply risks and dwindling oil inventories expected to persist. Investment houses express skepticism about the effectiveness of US administration moves, viewing them as politically motivated ahead of the midterm elections.
Bank of Israel's Monetary Committee faces a complex interest rate decision, with market expectations split between a further rate cut to 3.25% and maintaining the current rate of 3.5%. Support for holding rates steady cites global tightening and fiscal caution, with some analysts believing the Bank of Israel will wait due to a lack of urgency. Conversely, proponents of a rate cut point to positive domestic data, including a July inflation rate of 1.5% and a strengthening shekel. Some economists suggest the window for a rate reduction may be closing, making a gradual normalization of the monetary environment the appropriate step.
Semiconductor company Micron has tripled its value this year, benefiting from the AI boom, yet trades at a low forward P/E ratio. This is attributed to the cyclical nature of memory technology, though long-term agreements with customers until 2030 may provide structural stability and reduce volatility. The market remains skeptical about the sustainability of Micron's earnings, questioning whether the memory industry remains cyclical enough to justify its current deep discount.
