Israeli Markets React to Election Uncertainty, Not Collapse
Translated & summarized from Calcalist by baba
Israeli markets saw declines after the recent elections, with key sectors like banking and construction falling significantly, reflecting investor pricing of uncertainty and instability. The shekel weakened against the dollar, reversing pre-election gains. Analysts compare the situation to Brazil's market crash, deeming Israel's reaction a more moderate pricing of uncertainty. The primary economic risk is prolonged instability and a lack of government decision-making, with the private sector expected to sustain the economy.
The story in 6 lines · by baba
- Israeli markets declined post-election, with specific sectors showing significant drops due to uncertainty.
- The shekel weakened against the dollar, reversing gains made on hopes of a government change.
- Market reactions are seen as pricing in uncertainty, not a full-blown crisis, unlike Brazil's experience.
- JPMorgan's forecast for the shekel remains moderate, suggesting a professional market assessment.
- The main risk is prolonged uncertainty leading to a lack of government budget and decisions.
- The private sector, especially high-tech, is expected to drive the Israeli economy in the near future.
The Tel Aviv Stock Exchange experienced declines on the first trading day following the elections, though not a collapse. The TA-35 index dropped 1.8%, after falling by approximately 3% earlier in the day. Significant losses were concentrated in sectors heavily reliant on government decisions, such as banking (down 4.9%), insurance (down 5.2%), and construction (down 8.8%), indicating market pricing of stagnation and uncertainty.
In the foreign exchange market, the Israeli shekel weakened by about 1.6% against the dollar, reaching approximately 3.13 shekels, a reversal from its strengthening to around 3.03 shekels before the election amid optimism for a change in government. The bond market showed moderate movement, with the 10-year Israeli government bond yield rising 8 basis points to 4.12%, a fluctuation deemed not unusual.
Analysts interpret the market's reaction as pricing in uncertainty rather than a crisis, contrasting it with Brazil's market crash of 13.88% after its presidential election. The shekel's weakening trend began about a month prior, with the pre-election strengthening seen as a bet on a government change, and the current decline partly unwinding that position. The market's response is considered a "tolerable price" for this uncertainty.
Adding to the assessment, JPMorgan updated its shekel-to-dollar exchange rate forecast to 3.11-3.12, a range consistent with current levels and far from extreme, suggesting a professional, non-hysterical market view. The real risk, as highlighted by market indicators and Bank of Israel Governor Amir Yaron, is the potential for this uncertainty to become a permanent state, leading to prolonged periods without a budget, decisions, or plans.
The economic implication is stagnation, with the government operating under the previous budget due to the lack of a new one. This prevents approvals for defense budget increases, tax hikes, or significant spending cuts, effectively paralyzing the public sector. The private sector, particularly high-tech, is expected to drive the economy, offering a crucial engine independent of the Knesset's current paralysis.
