Not a few commentators argued that "Tzuk Eitan," the Hebrew name of the Israeli military operation in the Gaza Strip whose literal meaning of which is “mighty” or “steadfast” cliff, described Israel’s home front during the hostilities as much as the army. The same could be said for the response of the Tel Aviv Stock Exchange to the fighting.
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Between the official start of the operation on July 8 and Tuesday, when a 72-hour cease-fire took hold, the blue chip TA-25 index rose 1.1% while the broader TA-100 index gained 0.2%. The TA-Banking index, often viewed as a general indicator of the state of the Israeli economy, climbed 3.5%.
The bullishness on the TASE was also reflected in the bond market. During the fighting, the Tel Bond-20 index rose 1% and the Tel Bond Shekel index gained 1.2%. Long-term government bonds rose, though they were aided by a surprise cut in interest rates at the end of July. For example, the price of the10-year shekel bonds climbed 1.85% and their yields fell to a near-record low of 2.71%, while the price of longer-term bonds rose to as much as 2.8%.
The main negative impact was seen in the credit default swaps on Israeli government bonds, which reflect the risk premium for the Israeli economy. CDS contracts for five-year government bonds rose by some 30% during the fighting, although the absolute price was still relatively low. By way of comparison, the price for the swaps on Argentinean government debt, after the country defaulted last week, rose to 1,400 basis points; while the price for Israeli debt was only 90 points at its highest.
The relative strength of the Israeli economy was also reflected in the shekel, which not only stood firm but even rose against a number of major currencies during the fighting. The shekel lost only 0.1% against the dollar during the period to a Bank of Israel rate of 3.42 shekels. The euro actually weakened against the shekel, falling over the month by 1.5% to 4.58 shekels, close to its 12-month low.
“The exchange rate is the main parameter, and nothing happened there, despite the fighting and the cutting of the interest rate,” said Rafi Gozlan, chief economist at Tel Aviv’s IBI Israel Brokerage & Ivestments. “The shekel was the true barometer of the economy, much more than the CDS. The strength of the shekel during the fighting illustrates the general perception of the economy: It seems investors saw the fighting in the south as only a temporary event.”
‘No significant upside’
As the operation seems to be winding down, the real question most people are asking is where the stock market is heading next. Gozlan does not anticipate great volatility any time soon.
“I wouldn’t expect a significant upside. All in all, the stock market did not go backward during the fighting, so there’s no reason to expect it to correct going forward. Assuming that the quiet is preserved, there might be a certain optimism that may lead to gains, but no more than that,” he said.
“As far as the markets were concerned, the day after the war began two days after the operation began,” said Uri Greenfeld, chief economist at the Psagot Investment House. “At the beginning of the operation there were two days of losses, but since then the market has already corrected.”
Now the TASE is moving based on global markets and the fighting caused no major changes in Israel’s economic environment. It may have hurt the economy a bit, but most of the damage will be offset over time, said Greenfeld. “In my estimation, the local stock market will continue to move based on the trend that characterized it from the beginning of the year, a gradual rise with relatively high volatility,” he said.