The Tel Aviv Stock Exchange returned to activity today after a 4-day break (due to the Independence Day holiday) and is responding to the sharp declines in Wall Street in recent days. Leading stock indices are down more than 2% and in fact continue a trend that began as early as April 24. The TA 125 index reached 2,150 points and has since fallen by 6% (including a decrease of 2.2% today).
At the same time, the dollar jumped against major currencies in the world and also against the shekel, which weakened to about NIS 3.40 per dollar. Are the declines in the markets expected to continue?
● What led to the sharp falls in the markets the day after the US interest rate? | Guy Ben Simon, Commentary
Ronen Menachem, Mizrahi Tefahot’s chief economist, notes in a review published this morning (Sunday) that the local stock market has until recently demonstrated a relative advantage over foreign markets, but now, “after the holidays”, serious tests have been set for it. Differentiation from overseas markets, which is becoming increasingly difficult as declines and negative sentiment permeate almost everywhere. Second, after raising the interest rate in the country to 0.35%, we are ahead of a round of further interest rate hikes. Although their number and scope will probably be lower than in the world (and especially in the US), there will still be a more challenging period in terms of the cost of raising capital.
Third, Menachem writes, the summer session of the summer has opened and in the absence of a majority for the coalition, fiscal stability is being undermined (precisely after the momentum of last year’s budget approval) and the “smell of elections” will accompany the markets. “We know very well how important budgetary continuity is for credit rating companies and foreign investors, and it will also allow the Bank of Israel to carry out more gradual restraint. “For the first time, the implications of the conflict in Ukraine on the business sector.”
He says, “A routine reporting season highlights various companies for better or worse and their stocks are subject to sharp volatility. When it occurs against the background of all the tests I mentioned, the reporting season this time may be more” nervous “than usual. “The last two years, with widening effects on the rate of inflation and additional support for the Bank of Israel’s intention to raise interest rates again later this year.
However, he writes, one must remember the factors that work in favor of the market. “First, in light of the very low budget deficit, government raising is also small and will partially offset the impact of raising interest rates on the cost of capital (less competition for the business sector). Second, growth figures are still good and so is declining unemployment. If world foreign trade is now in a slowdown) .4th, less sensitivity of domestic inflation to oil and gas items than in Europe and the US. “Overall, foreign markets may also push the local market towards declines, but their strength and continuity with us will be affected, among other things, by the development of the reporting season and local considerations.”
Best Lapel: Gradually increase stock exposure
Alex Zabrzynski, the chief economist of Meitav Dash, estimates in his weekly survey that the consumer price index for April (which will be published in a week), is expected to rise by 0.9% and the May index to rise by 0.6%. “An increase in the risk of inflation and warming of the labor market increase the chance of a faster rise in the Bank of Israel’s interest rate. To 1.75% -2% “.
Regarding the developments on Wall Street in recent days, he writes that the conclusion that emerges from market developments after the Fed’s announcement last week indicates that investors who previously feared excessive interest rates while underestimating the risk of inflation, are now more afraid of inflation becoming a more dominant risk. Under these circumstances the best thing a central bank and not just the US can do is send a message that it will do everything in its power to curb inflation without “softening” attempts to “please” the markets.
In his view, “the risk of continued rising long-term yields in the U.S. has diminished. In light of this, and in light of the Bank of Israel’s rise in interest rates, which is reflected in the yield curve, we are raising the recommended short-term to medium-to-medium-term. We continue to recommend bias to the adjacent channel. “
Zabrzynski also makes a recommendation to the US stock market for “medium exposure.” This is partly because, in his estimation, the rise in the Fed’s interest rate is already largely reflected in stock prices. Hence, “no further significant increase in yields is expected, which was one of the reasons for the declines in the stock market, especially in growth stocks.” In addition, the risk of a significant US recession is relatively low, companies hold very large liquid balances and continue to invest at an increased rate, the labor market is strong not only in the US but also in many developed countries, unemployment continues to fall in most countries and vacancies are very high.
He further notes that according to the survey of private investors in the US, they are quite pessimistic. It seems that a lot of “hot money” has already come out of the market. On 17.2.
On the risk side, he writes that “the biggest risk to the economy and the stock market right now are the consequences of the war in Ukraine and China’s dealing with the plague. It is difficult to estimate how long these events will last and their potential for damage.”
Bottom line: “We raise a recommendation for the equity channel for medium exposure. We recommend gradually increasing exposure to growth stocks, particularly technology.”
“We continue to prefer the short-term linked markets in the bond market”
Yonatan Katz and Lider Capital Markets economists estimate in a review published that the Bank of Israel’s interest rate will be 1.5% at the end of 2022 and 2% in another year. “We continue to prefer the short-term bond markets in the bond market due to the continuation of the shekel devaluation trend and the expectation of high indices in both April and May (above market expectations).”
Regarding the currency, they write that “in recent years, the appreciation trend in the shekel has supported relatively moderate inflation. The appreciation in the shekel is supported by basic positive factors and increases in the markets. Looking ahead, although Israel is still expected to enjoy a current account surplus, it seems
That the nervousness (towards declines) in the markets will continue to support the depreciation of the shekel. “Other inflation factors also support accelerating prices, including accelerating wages, stability or rising commodity prices and accelerating rental prices.”
Leader now estimates that inflation in the coming year will be 3.3% (compared to the previous forecast of 3%) and the shekel exchange rate against the dollar will be 3.40 in another year (similar to its exchange rate today).