Israeli Markets Brace for Mixed Global Open Amid Geopolitical Tensions

The Tel Aviv Stock Exchange is expected to open positively, buoyed by falling global oil prices and a positive arbitrage gap from dual-listed Israeli companies returning from Wall Street. Dual-listed stocks are projected to provide a theoretical boost of about 0.3% to the TA-35 index, with technology and defense stocks like Camtek, AudioCodes, and Elbit Systems expected to lead gains. However, potential headwinds exist, notably from Formula Systems, which is facing a significant negative gap of 5.5%, and other large companies like Palo Alto, Teva, and Nice.

Last week saw the Israeli bourse underperform global markets, with the TA-35 index declining by 0.6% and the TA-90 by 1.1%. Construction and real estate indices suffered due to interest rate pressures, while the oil and gas index fell approximately 3% on lower crude prices. In contrast, the technology index rose 1.2%, and the aviation sector saw significant gains, with Israir Group up over 10% and El Al soaring more than 15% on expectations of renewed flights to Dubai. El Al is nearing potential inclusion in the TA-35 index, alongside Doral Energy.

Globally, Asian markets are mixed, with Japan's Nikkei index surging 2.3% to a new historic high, while Hong Kong's Hang Seng saw a slight dip. Trading volumes are thin as mainland China and South Korea observe holidays. U.S. futures suggest a modest negative open on Wall Street, with the Dow Jones, S&P 500, and Nasdaq futures indicating slight declines. Despite a positive end to last week driven by employment data, the U.S. market closed mixed, highlighting a divergence between old and new economy stocks. The Nasdaq reached a new all-time high, driven by the chip sector, with Nvidia and AMD breaking records. However, analysts at Bank of America warn of excessive optimism, citing a "seller SSI" indicator nearing a sell signal and over 50% of S&P 500 stocks being down more than 20% from their peaks.

The Israeli bond market reflects investor caution, with yields rising on the longer end of the curve. The 10-year government bond yield is around 4.137%, with 20 and 30-year bonds at approximately 4.49% and 4.64% respectively. The short end of the curve remains stable. In the U.S., surging Treasury yields to generational highs are concerning investors, with the 10-year yield reaching 5.28%, a level not seen since 2002. This rise, fueled by fears of a European debt crisis and a lukewarm U.S. jobs report, has sparked debate about whether 5% yields are a ceiling or a new floor. The increased cost of financing impacts households, corporations, and governments, with smaller, leveraged companies feeling the strain more acutely.

The Israeli Shekel showed relative resilience against a strengthening U.S. dollar last week, settling at 3.05 shekels per dollar despite global dollar strength. The global DXY dollar index rose about 1% to a 1.5-year high of 101.9 points, driven by expectations of high U.S. interest rates. Bank Hapoalim notes that despite local geopolitical events and upcoming Knesset elections, global developments, particularly U.S. Treasury yields, are the primary market drivers. In energy markets, despite increased crude oil flow from the Middle East and a G7 decision to release emergency oil reserves, prices remain elevated due to geopolitical anxiety. Brent crude is around $102 per barrel and WTI is above $90, significantly higher than before the conflict. This volatility is attributed to ongoing tensions in the Persian Gulf, the Strait of Hormuz, and Yemen, leading OPEC+ to postpone quota reviews. Shipping costs have surged, with daily charter rates for supertankers reaching a historic high of over $1.2 million.

The U.S. labor market presented mixed signals, with only 29,000 jobs added in September, a sharp drop from August, though the unemployment rate remained stable at 4.2%. This pace is just enough to absorb new entrants into the workforce. While hiring has diversified beyond healthcare into construction and industry, driven by AI infrastructure needs, job seekers, especially recent college graduates, face difficulties, with a historically high unemployment rate nearing 6%. Wage growth has also slowed to 3.0% annually, indicating challenges for employees seeking better-paying positions amidst rising inflation. Companies are cautious about hiring due to increasing uncertainty from tariffs, conflicts, oil prices, and the potential for automation and AI to replace junior roles.

Following a mixed September for U.S. markets, J.P. Morgan has identified preferred stocks for October. Among them are American Express, recommended for its value proposition despite a year-to-date drop, and Liberty Energy, favored for growth potential driven by AI and electricity demand. Thermo Fisher Scientific is also highlighted for its strong financial outlook and a new partnership with the Mayo Clinic, with analysts expecting further gains due to AI adoption and U.S. government initiatives to reshore biopharma manufacturing.