Israeli Stock Market Opens Week Amid Global Uncertainty and AI Concerns

The Tel Aviv Stock Exchange is opening the week with geopolitical tensions, high oil prices, and concerns over AI company debt contributing to market anxiety, despite a 4% rise last week. Wall Street indices show fear, with the VIX up 35% and CNN's Fear & Greed index at extreme fear, though Nasdaq futures are showing a 1% recovery. Upcoming elections in Israel and the US are expected to increase volatility. Last week's gains in Tel Aviv were partly driven by lower inflation, but economists anticipate no interest rate cut from the Bank of Israel this Wednesday. Dual-listed stocks are returning with negative arbitrage, and chip stocks like Tower Semiconductor, Nova, and Camtek are expected to fall. Palo Alto Networks is also predicted to drop significantly after a decline in New York trading.

Israeli savings are more exposed to stocks than ever. Last Friday, positive inflation data led to sharp gains in Tel Aviv, with the TA-35 index rising 1.6% and TA-90 up 1.9%. The local market closed the week with a 4% rise in TA-35 and a 4.2% rise in TA-125, led by the construction sector. The defense and insurance sectors also saw significant gains.

Globally, Asian markets are mixed, with Japan's Nikkei down 0.8% and South Korea's Kospi up 0.6%. China's Shanghai Composite is unchanged, and the MSCI Asia Pacific index is down 0.6%. China's Q3 economic growth accelerated to 4.5%, exceeding expectations, which may reduce the likelihood of further government stimulus. Wall Street is returning after its worst week since June, with Nasdaq down 4.5%, though futures are up over 1%. The semiconductor sector faced sharp declines, with the VanEck Semiconductor ETF down 3% for the week, its worst weekly drop since April 2025. Cloud computing company Corwave plummeted nearly 12% on Friday due to its substantial debt, exceeding $51 billion. Michael Rosen of Angeles advised monitoring debt issuance levels but noted current levels are not excessive. Energy stocks, including Chevron, helped moderate Dow Jones declines.

This week, Wall Street faces significant earnings reports from tech giants like Netflix, Meta, and Tesla, amidst concerns about financing costs and the justification of AI investments. Western Digital, Lam Research, and Texas Instruments will provide insights into chip demand.

US Treasury bonds are showing signs of returning to their traditional safe-haven role, with the 10-year yield falling 0.17 percentage points last week. Corporate bonds, however, are facing pressure due to concerns over debt financing the AI revolution. Goldman Sachs noted that yield spreads on AI-related speculative-grade bonds widened significantly, reflecting a reassessment of AI investment viability, particularly for lower-rated borrowers. Corwave is a prime example, with its bond yields soaring to around 15% from a 9.675% issuance in June.

The Israeli Shekel weakened by 1.7% against the dollar last week, reaching a six-month high of 3.11 shekels per dollar, despite a slight retreat in the dollar index. Local risk and demand for foreign currency are also impacting trading, with tensions in the Middle East potentially disrupting energy supplies and trade routes, which could further support the dollar and pressure the Shekel. Oil prices rose due to heightened tensions between the US and Iran, and Russia and Ukraine, with WTI crude reaching $101.41 per barrel and Brent crude at $109.86.

Israeli inflation data for September surprised positively with a 0.5% decrease, leading to an annual inflation rate of 1.6%. However, economists largely agree that the Bank of Israel is unlikely to cut interest rates this week, citing seasonal factors and potential future price pressures. Nissan Avraham noted that a widening interest rate differential in favor of the US could weaken the Shekel and increase import costs. Ronen Menachem stated that while current inflation allows for future rate cuts, housing and fuel uncertainties necessitate caution.

In the US, higher-than-expected inflation data, influenced by energy prices, continues to be a concern. Producer prices saw their sharpest rise since 2022, and consumer inflation remains well above the Federal Reserve's 2% target. Fed Chairman Kevin Warsh's recent remarks were interpreted as a signal that the Fed might keep rates unchanged at its upcoming meeting, with an 82% probability according to CME Group's FedWatch tool.

US government debt interest payments reached a record $1.05 trillion in the fiscal year ending September, projected to hit 3.2% of GDP. Despite these figures, economists emphasize that the US is far from a debt crisis, citing strong demand at bond auctions and continued credit flow.

Despite widespread pessimistic forecasts for Wall Street, the Kobeissi Letter suggests a different perspective: the S&P 500 is trading near its all-time high while 84% of its constituent stocks are in correction territory. This "hidden bear market" could present a significant opportunity. The analysis highlights that only ten stocks are responsible for about 70% of the S&P 500's gains since March. The potential for broader market gains exists if geopolitical tensions ease, oil prices fall, and inflation moderates, potentially allowing more stocks to recover. Nvidia's forward P/E ratio has decreased, and company earnings continue to grow, suggesting potential for higher multiples and wider market rallies if macroeconomic pressures lessen. However, sustained high oil prices and inflation could negatively impact even the market leaders.