Global Sell-Off Hits Tel Aviv Stocks; Inflation Fears Grip Markets

The Tel Aviv Stock Exchange is expected to open lower on Tuesday, mirroring a global sell-off in the technology sector. This downturn was triggered by higher-than-expected U.S. inflation data, which sent bond yields soaring and Wall Street tumbling. Asian markets followed suit, and U.S. stock futures are also trading down. Israeli tech and pharma companies, which are dual-listed, are returning to Tel Aviv with significant negative arbitrage gaps, expected to weigh heavily on the local market. Tower Semiconductor is leading the decline with a 4.1% negative gap, followed by Teva Pharmaceutical Industries (2.5%), Ormat Technologies (2.5%), Palo Alto Networks (1.9%), and Nova (1.6%). Conversely, Camtek is expected to provide some positive influence with a 2% positive gap, and ICL Group with a 0.4% positive gap.

U.S. inflation data for September came in at 3.7% year-over-year, exceeding forecasts and dampening expectations for Federal Reserve interest rate cuts. This has led to a surge in U.S. Treasury yields, with the 10-year yield reaching a daily high of 5.33% and the 2-year yield hitting 4.93%. Experts warn that the Federal Reserve may need to continue raising interest rates, with Wells Fargo predicting up to four more hikes by the end of 2027, potentially pushing the 10-year yield to 5.5% or even 6%. However, some analysts, like John Luke Turner of Aptus Capital Advisors, caution against excessive rate hikes that could harm the real economy, pointing to the growing U.S. national debt.

The global commodities and currency markets are also experiencing volatility. The U.S. dollar has strengthened against the Israeli shekel, reaching over 3.1 shekels for the first time in six months, a trend often seen during U.S. stock market declines. Oil prices have fallen, with Brent crude down 1.63% to $104.33 per barrel and WTI down 1.08% to $94.06, despite ongoing security concerns in the Middle East, including the sinking of a container ship in the Strait of Hormuz. Factors mitigating price increases include potential U.S. sanctions relief on oil shipments from certain countries and the release of strategic petroleum reserves.

In Israel, the September Consumer Price Index (CPI) is expected to show a slight decrease of 0.3% to 0.4%, bringing the annual inflation rate to 1.7%-1.8%. This is largely due to a drop in airfare prices and government measures to reduce fuel taxes. However, analysts warn this may be temporary, as the fuel tax reductions are set to expire after the upcoming elections. Despite the expected dip in the CPI, the Bank of Israel is widely anticipated to keep its interest rate unchanged at its upcoming meeting on October 21st, citing global interest rate hikes, the weakening shekel, and geopolitical uncertainty.

Investment strategies are also shifting, with RBC Capital Markets downgrading its recommendation for the technology sector from 'overweight' to 'market weight' due to high valuations. RBC is now favoring the healthcare and pharmaceutical sectors, which have shown resilience and attractive valuations. This shift was evident in recent trading, where the healthcare sector outperformed, led by major pharmaceutical companies.