Tel Aviv, Istanbul Stocks Sink in Wake of Flotilla Clash

It was a bad day for Israeli shares and a worse one for Turkish equities Monday, as relations between the two countries descended to a new low.

It was a bad day for Israeli shares and a worse one for Turkish equities Monday, as relations between the two countries descended to a new low after the deadly clash between Israeli Navy forces and international activists heading by boat to the Gaza Strip.

Gaza flotilla

Both Israeli share prices and Istanbul stocks finished more than 1.5% lower as Turkey cancelled joint military exercises with Israel and called for an emergency meeting of the UN Security Council. But while Turkish bonds took a hit, Israeli bond prices were largely steady: Government bonds ended unchanged and corporate bonds finished yesterday with a slight positive bias.

Israel has defended the Navy's decision to open fire on the activists during its interception of the boats, which ended with at least 10 activists being killed. In the wake of the news, thousands converged on Taksim Square in downtown Istanbul to protest Israel's use of force.

The shekel inched up against the dollar yesterday, though it lost ground against the resurgent euro. "There was a slight feeling of retreat in equities and in the shekel [in the morning,] but there was no real sense of upset following the events at sea," said Dror Zakash, head of the First International Bank of Israel's dealing room.

History teaches that events of the kind may cause a dip, but it passes, he said: "Investors don't relate to the event as one that could change trends, or sentiment, regarding Israel."

"At this stage, the story hardly touched share prices," said another player. "But it could damage relations between Israel and Turkey, and cause tensions with the U.S. That reminds [international] players where we are on the map, and raises the question again about Israel's risk premium. However, if the issue dies down with a few days, the ramifications could be minor."

That remains to be seen. The Turkish lira and bond prices weakened yesterday as traders said relations between the two countries had entered uncharted territory. Israeli bonds on the other hand were largely unchanged.

Turnover in Israeli shares was normal, at NIS 1.9 billion.

One thing that both Turkish and Israeli stocks had in common yesterday was that both spent the entire day under water. The benchmark TA-25 index closed 1.6% lower at 1,083 points and the TA-100 index lost 1.5% to 1,009 points.

Both the Real Estate-15 and Banks-5 indexes fell 2.3%.

Looking around the world, European stocks were flat with a wee positive bias and the euro steadied (though it gained ground against the shekel in the local forex market ), and gold prices ticked up as investors continued to show a taste for safe harbor. London markets were closed for the day. The FTSEurofirst 300 index of top European shares edged up 0.3% even though on Friday, the credit rating agency Fitch downgraded Spain's sovereign credit rating.

"It's just a reminder that the euro zone crisis hasn't gone away. It's still lurking," Bernard McAlinden, investment strategist at NCB Stockbrokers in Dublin, told Reuters yesterday. France hardly reassured the investment community, saying on Sunday that keeping its top-notch credit rating would be a stretch without some tough budget decisions.

Bank shares lose ground

Israeli bank shares fell strongly yesterday despite a report from the Knesset's research and information center, showing that the profits of the banks' credit card companies are growing by more than 25% a year, and that the average return on equity in the credit-card sector is nearly 38%. That is a lot, so much that the research center concluded the credit card companies are earning more than is normal, and that is because their fees are too high. Yet Bank Hapoalim shares fell 0.8%, Discount retreated by 3.4%, Beinleumi (First International Bank ) fell 4.4% and Leumi lost 2.9%.

Moving on to drugs, Teva Pharmaceutical Industries fell 0.6%. At the end of last week, the company said it would stop producing the anesthetic propofol, which could lead to an acute shortage in operating theaters. The drug is difficult to make and margins on it are low, the company said. It's also true that Teva faces about 250 lawsuits in connection with the drug.

Jerusalem Economic shares fell 0.4% despite reporting that operating income increased by 460% to NIS 208 million, in part due to upward revaluation of the company's properties. Moreover, it netted NIS 64 million, compared with losing NIS 106 million in the same period of 2009.

Delek Group shares on the other hand gained 2.1% yesterday after the company reported a 30% increase in net profit against the same period of 2009, to NIS 205 million.

Shares of the real estate company Alrov Real Estate fell 3.7% after the company admitted that income from regular operations fell 13% to NIS 53 million, and its net profit attributable to shareholders plunged to NIS 16 million, from NIS 51 million in the parallel quarter of 2009.

No exchange rates

The Bank of Israel did not publish official exchange rates for the shekel against the euro, the dollar and other currencies yesterday, because of the cessation of trading in London and the United States. However, the banks reported that the dollar had appreciated by roughly 1% against the shekel in late afternoon trading, to NIS 3.865, while the euro appreciated by 0.1% to NIS 4.76.