Stock and Bond Prices Rally on Cease-fire, Interest Rates

TA-25 index gains 1.4% for the day as government’s 10-year shekel bond touches record high

Tomer Appelbaum

Stock and bond prices rallied on Wednesday as investors celebrated what they hoped was the end to the 50-day-long conflict with Hamas and a surprise cut in interest rates by the Bank of Israel.

The Tel Aviv Stock Exchange’s benchmark TA-25 index broke through the 1,400 level to end the day at 1,408.54 points, a gain of 1.4% for the day, on heavy turnover of 1.39 billion shekels ($390 million). The broader TA-100 index rose 1.43% to finish at 1,267.93.

Bond prices also rallied. The price of the government’s 10-year shekel bond rose 0.14% to a record high, cutting its yield to 2.48%. That put it closer than ever to the yield on the equivalent U.S. treasury bond, which was 2.39%, and capped a year-to-date rise for the bonds of 11.5%.

The drop in yields came despite the start of a wrenching debate in the government over the war’s impact on the budget and expectations that the government will widen its target budget deficit next year, which would mean more borrowing and pressure yields higher.

Corporate bond prices were also higher for the day, with the Tel-Bond 20, 40 and 60 indices up as much as 0.17% by closing time.

The reaction of the shekel to the developments of the past two days was more restrained. After shooting up more than 0.8% on Tuesday, the dollar weakened slightly on Wednesday by 0.03% to a Bank of Israel rate of 3.5710. The euro lost even more value, weakening 0.14% to 4.7092.

The market rally came a day after Israel and Hamas agreed to a cease-fire ending Operation Protective Edge. Although previous truces had failed, the feeling was that this one would hold, bringing an end to a conflict that threatens to shave some 0.5 percentage point off Israel’s gross domestic product and has saddled the government with a big increase in defense expenses.

A day earlier, the central bank took the markets by surprise by announcing an 0.25-point cut in its base lending rate to a record low of 0.25% for September. The bank cited low inflation as well as concerns about a slowing Israeli economy and the economic impact of the Gaza war.

“The Bank of Israel lowered the interest rate in an attempt to prevent a further deterioration in inflation expectations and, so it seems, to give more momentum to the depreciation that has begun in the shekel rate,” said Yaniv Hevron, chief economist at Excellence Investment House.

Nevertheless, he termed that rate cut a “dangerous game.” If the U. S. Federal Reserve begins raising its interest rates early next year, as Hevron said he expected, the Bank of Israel will be able to raise its rates, too. But if the Fed doesn’t act, Israeli rates will remain low, causing asset prices – in particular home prices – to rise dangerously, he warned.

Share prices were higher across the board, but the sharpest gains were in insurance, energy and real-estate shares. In property, Alrov Real Estate and Africa Israel Investments were the top gainers in the TA-100 index, with Alrov advancing 5.5% to a close of 83.14 shekels and Africa adding 5.3% to 6.11 shekels, respectively. Energy shares were led by gains of 2.1% for Avner to a close of 3.52 shekels and Delek Drilling’s 3.3% gain to 19.78.

Other big gainers in Wednesday’s trading included Yitzhak Tshuva’s Delek Group, which finished 4.5% up at 1,307 shekels.

In fact, despite Wednesday’s post-war surge, the fighting had little effect on share prices. For most of the fight, the TA-25 remained above 1,379.37 points, its closing the day before Israel launched Operation Protective Edge.

The shekel, likewise, strengthened during the first two weeks, finally losing ground to two back-to-back interest rate cuts by the Bank of Israel, a strong dollar globally and concerns about Israeli economic growth based on second-quarter figures, before the fighting began.