Stocks, Shekel Skid Amid Fears of U.S. Attack on Syria

Worries about a U.S. attack on Syria lead to global equity losses, while oil rises to a six-month high.

Fears that a U.S. military attack on Syria is imminent sent shares on the Tel Aviv Stock Exchange tumbling for a second day yesterday, as the shekel saw its biggest one-day loss against the dollar in three months.

The TASE's benchmark TA-25 index finished with a drop of 2.4%, to 1,156.19 points, on a day of unusually heavy trading with some NIS 1.556 billion in shares changing hands. Together with Monday's decline, the index of blue chip stocks has lost 3.5% of its value. Banking, energy and communications stocks took the heaviest losses.

The shekel, meanwhile, extended its losses against the dollar and the euro yesterday. The Israeli currency weakened by 1.5% against the greenback to a Bank of Israel rate of NIS 3.6570, although it recovered slightly in late trading. On Friday the dollar was fixed at NIS 3.588. Against the euro, the shekel was down about 1.3% to a Bank of Israel rate of NIS 4.8807.

Bond prices were also sharply lower. The government's 10-year Shahar bond dropped 0.24% to bring its yield to 4%. The government's unlinked Galil bond dropped a steep 0.43% to lift its yields to 1.86%.

Daniel Rapoport, head of equities and derivatives trading at Leumi Capital Markets, said the threat of a wider conflict led to across-the-board selling of stocks in Tel Aviv and redemptions by mutual funds. "People fear that this could escalate and Israel would be attacked after Syria is attacked," he said.

"After a long period of the market's barely moving, the TA-25 index has quickly broken below the 1,200 level," said Ziv Pnini, trading room manager at Migdal Capital Markets. "The fact is the headlines are not good, the destroyers are on their way to Syria and the dollar's jump on the shekel is not helping to calm local investors.

Rony Gitlin, head of spot trading at Bank Leumi, added that dollar buying was mainly by foreign banks that were also selling other emerging market currencies.

U.S. President Barack Obama is reportedly considering cruise missile strikes against Syrian targets in response to the August 21 chemical weapons attack that U.S. officials are increasingly confident was launched by the Syrian government. "The options that we are considering are not about regime change," said White House spokesman Jay Carney. "They are about responding to a clear violation of an international standard that prohibits the use of chemical weapons."

Iranian news agency Fars, meanwhile, quoted an unnamed Syrian military source that warned, "Israel will also be set on fire" if the West attacks. Syria will target Tel Aviv in retaliation, the military source said.

The war worries weren't confined to Israel and the TASE. On Wall Street, the Dow Jones industrial average was down 0.9% in mid-afternoon, to 14,811.4; the S&P 500 lost 1.3% to 1,635.95 and the Nasdaq Composite dropped 1.8% to 3,592.102. The pan-European FTSEurofirst 300 index of top European shares ended down 1.7% at 1,202.36.

The possibility of Western military action against the Syrian government pushed oil prices to a six-month high and sent equities worldwide substantially lower yesterday. Both Brent and U.S. crude gained upward of $3 a barrel.

Back in Tel Aviv, however, analysts said they were not convinced that the market faced any fundamental risks. Yair Shani, investments manager for IBI Mutual Funds, said the market is more concerned with whether the U.S. Federal Reserve will unwind its stimulus program, rather than a conflict between the U.S. and Syria.

"We're not heading into a crash," he said. "A situation in which an attack on Syria looks to be in the works certainly raises uncertainty, but it's still not clear what will be the impact on Israel, if any The question isn't what will happen in Syria but what will happen in the U. S.

Shani said Israel's economic fundamentals didn't dictate a sharp drop in share prices. "Even if there are sharp drops, it will create an investment opportunity on the Israeli market," he said.

Oithers said that yesterday's turnover, while relatively high, was not high enough to suggest that big institutional investors were offloading stock. "Everyone may be talking about reducing their Israel exposure, but we don't see it in practice," said Yaniv Hevron, chief economist at Excellence Investment House about foreign investors. "The interesting question is whether the public will start to sell the mutual fund holdings."

Reuters contributed to this report

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