US-Iran Tensions Impact Markets as Israeli Inflation and Health Sector Rally Dominate

The new trading week opens amid escalating Middle East tensions, with the US conducting a series of strikes against Iran for the eighth consecutive night. Brent crude oil prices are nearing $90 per barrel, driven by reports of US military reinforcements following Iranian attacks that killed two American soldiers in Jordan and Iran's formal withdrawal from a June understanding with the US. Investors are also closely monitoring developments in the AI sector, particularly semiconductor stocks, which officially entered a bear market last week with declines exceeding 20% from recent highs. Key tech earnings reports are expected this week from Alphabet (Google), Tesla, and Intel, whose stock has surged over 150% this year. In macroeconomic news, US manufacturing and services PMI data will be released, but the main event is the European Central Bank's interest rate decision on Thursday, expected to hold steady at 2.25%.

Semiconductor stocks are expected to face continued pressure, with mixed performances anticipated among Israeli dual-listed companies such as Camtek, Tower Semiconductor, and Palo Alto Networks. Despite geopolitical tensions, the Tel Aviv Stock Exchange closed last week positively, led by a 5.5% jump in the oil and gas index following a gas export memorandum signed by Israel's Isramco with Egypt. The banking sector also improved, turning positive for the year. Conversely, Wall Street ended lower, with the S&P 500 down 1.6% and the Nasdaq tech-heavy index falling 2.9%, dragged down by chip stocks and Netflix, which reported slightly below-forecast Q2 revenues and reduced its annual viewership data reporting frequency. SpaceX shares also declined after canceling a Starship launch attempt.

The Israeli shekel weakened by about 1.3% against the US dollar last week amid rising oil prices, which surged over 15% due to the Middle East conflict. Brent crude closed near $88 per barrel. Analysts from Rystad Energy suggest a limited US-Iran agreement remains the most likely outcome, though confidence has waned. Economists note that Iran has strong economic incentives to avoid a complete breakdown in talks, while the US aims to lower oil prices ahead of November midterm elections.

Regarding inflation in Israel, despite a recent slowdown to an annual rate of 1.6%, below the Bank of Israel's target range, experts like Yoni Penning from Mizrahi Tefahot expect an inflation trend reversal soon, potentially affecting interest rate expectations. Bank Hapoalim's economic team also anticipates a gradual rise in inflation expectations, which may limit further rate cuts beyond 3.25%. In the US, markets price in at least one rate hike this year, with Bank of America uniquely forecasting three increases starting in September. Federal Reserve officials have recently signaled openness to higher rates to balance inflation and employment goals.

On Wall Street, the US healthcare sector is gaining momentum after underperforming, with the XLV ETF rising over 10% since mid-May, outperforming the S&P 500. Major holdings like Eli Lilly, Johnson & Johnson, AbbVie, UnitedHealth Group, and Merck have all posted strong returns. Citi analysts attribute this rally to promising developments in biopharma, especially obesity drugs, and improving sentiment toward health insurers. Goldman Sachs and JP Morgan also view the sector as robust and ripe for mergers and acquisitions. Goldman highlights the unique consumer and medical demand driving the obesity drug market, forecasting global sales to reach $114 billion by 2030, with oral medications comprising 40% of the market.

The European Central Bank's upcoming rate decision remains a key focus, with markets largely expecting no change but an 85% chance of a 0.25% hike in September amid ongoing geopolitical and inflation uncertainties.