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The sea change on the Tel Aviv financial markets is no secret anymore. The shekel has been losing ground for five weeks along with major stock indices and the bond market. If in mid-July many investors were worried about slow summer doldrums, in early August with a flood of bad news, the major concern is a crash.

The financial markets waited 1,000 days for the first buds of a peace process, Yasser Arafat's replacement by a leader in a suit and tie instead of fatigues, and the declaration by Prime Minister Ariel Sharon that the occupation cannot continue much longer.

The positive geopolitical developments all came together on the back of the official end to war in Iraq, as well as changes in the Finance Ministry's macro-economic policy and Silvan Shalom's replacement at the top of the treasury pyramid by a figure of more substantial specific and economic weight.

All this repressed the miserable atmosphere that had prevailed on financial markets in 2002, and the indices and the shekel soared. But just four months after the last of Saddam Hussein's palaces fell, U.S. soldiers set up camp on the Syrian border and global energy prices plummeted along with Israel's risk premium, the euphoria in Tel Aviv is over.

Market players are again pricing the serious fiscal problems, the scarier than expected deficit, the weak, corrupt political scene, and the yields on long-term U.S. bonds.

Macro-economists are again talking about the unholy trinity of rising unemployment, receding tax revenues and weak local demand. In addition, economists expect renewed talk about Israel's sovereign credit rating near the end of the year, which could boost shekel devaluation.

T-bills have also posted a sharp gain in yields in recent weeks to 4.4 percent, leading foreign investors to trade their shekel denominated bonds for dollars and seek less risky markets.

Since its July 2 peak when the Maof-25 blue chip index hit 447.5 points, leading indices have fallen 11 percent. The dollar has gained approximately 20 agorot in strength here from trading in early July at NIS 4.28.

For all practical purposes, the stock exchange rolled the clock back two months yesterday. The last time the Maof traded below 400 was May 3, the last trading day before a 7 percent leap. Indices are still higher than they started the year, and the Maof saw a bottom of 294 points in February, so this is not a crash yet.

Indices continued to post relatively sharp drops yesterday and the shekel lost ground. Shekel-dollar options trade reflected an exchange rate of NIS 4.82 to the greenback. The TA-25 lost 2.15 percent to 398 points. Shekel-denominated bonds also saw sharp 2.2 percent drops, and long term yields were 8.7 percent.

Yesterday's negative trade is attributed not only to recent ominous developments, but also to what looks like a new direction in relations between central bank governor David Klein and Finance Minister Benjamin Netanyahu. The market is concerned we're about to see a spate of disagreements between the two, which does not bode well.

Players note that the devaluation of recent weeks augurs bad news for a change in central bank policy - reducing the pace of interest rate reductions.

The peace process isn't looking so promising either. There are concerns that the cease-fire will collapse and a new wave of terror will wash over the land as the Palestinian Authority fails to deal with the terror organizations. The first signs of possible post-hudna terror are already evident in the past few days.

With all of that said, we cannot forget that so far 2003 has been kind to investors. Markets are still up 19 percent on their starting levels and 35 percent higher than their February lows. The Maof-25 blue chip index may have closed under 400 yesterday, but it is still 104 points higher than that dismal 294 day in darkest February.