Bank of Israel Rate Cut Fuels Dramatic Stock Market Rally

The Bank of Israel's decision to lower its benchmark interest rate to 3.25% has significantly shifted investor preferences, driving demand back towards stocks sensitive to interest rate environments. This policy move spurred a notable rally in the Israeli stock market during a shortened trading week.

The Tel Aviv 90 index (TA-90) emerged as the top performer, surging 5.5%, outpacing the Tel Aviv 125 index's 2.9% rise and the Tel Aviv 35 index's 2.2% gain. This sharp increase was primarily fueled by a significant jump in real estate and construction stocks, which hold substantial weight in the TA-90. Analysts anticipate that lower interest rates will reduce financing costs and support economic activity recovery in these sectors.

Investors appear to be gradually returning to mid-cap stocks, recognizing their potential to benefit more from the ongoing interest rate reduction process, following a period of underperformance. The rate cut also continued to support the domestic debt market, particularly short- and medium-term instruments and corporate bonds.

However, rising U.S. Treasury yields and concerns over renewed security escalations exerted pressure on long-term Israeli government bonds. The yield on Israel's 3-year government bond decreased slightly, while the 10-year yield saw a modest increase. The corporate debt issuance market was subdued, though Bank Hapoalim successfully raised approximately 1.8 billion shekels through two new series of bonds.

Mutual funds experienced net inflows of about 1.65 billion shekels, with a strong preference for passive funds. Equity funds focused on the local market attracted around 736 million shekels, led by TA-125 and TA-90 funds. Real estate and construction funds also saw inflows, reflecting the strong performance of related stocks. Bond funds registered net inflows, while money market funds experienced slight outflows.