Investors are gradually returning to the Israeli markets

A month after the October 7 attack by the Palestinian militant group Hamas in Israel, which turned into a war, investors are gradually returning to the country's financial markets.

Stock and bond prices in Israel have recovered, even if the main indicators of risk aversion in the market, such as credit default swaps (CDS), are still showing warning signs, according to Reuters.

At the same time, the Israeli shekel marked an important comeback this week, recovering the 5% percentage lost in the days after last month's atrocities. However, for the whole of the current year, the shekel remains one of the currencies with the weakest evolution globally, losing 13.36%, according to Reuters. After the shekel, the currency with a weaker evolution is the Russian ruble (-25.38%), followed by the Turkish lira (-33.9%).

Yaniv Pagot, head of trading at the Tel Aviv Stock Exchange, says: "The fact that the fighting is only in Gaza (for now) and not in the north helps local investors focus on economic fundamentals."

The initial fear of many analysts was that the war in Israel would turn into a severe regional conflict involving Hezbollah, but this has not happened, at least for now.

• Support from the Bank of Israel

Israel's central bank supported the market with a series of measures and stayed away from interest rate cuts. The institution has warned that the economy will slow down, but points out that it was in solid shape before the war and should recover, as has happened after other conflicts.

"We knew how to recover from the difficult periods of the past and quickly return to prosperity. I have no doubt that this will happen this time as well", declared the governor of the central bank, Amir Yaron.

At the beginning of the war, the Israeli financial markets were severely affected. The shekel, which had already fallen 10 percent in 2023 in part because of the government's controversial plan to overhaul Israel's judiciary, lost 5 percent at the outbreak of the war, hitting an 11-year low. The currency's dynamics changed last week, also supported by the fact that the US Federal Reserve signaled that it will probably not need to raise interest rates again, which caused the dollar to depreciate significantly.

"Market sentiment has stabilized and, broadly speaking, this is due to the fall of the dollar," said Geoff Yu, senior forex and macro strategist at BNY Mellon, quoted by Reuters, adding that, at the same time, Israel's central bank "launched a credible package in response to the escalation of the war, helping to alleviate concerns about a major depreciation of the Israeli currency, which would create financial instability and fuel inflation."

Just two days after the start of the war, the central bank in Tel Aviv said it would sell up to $30 billion in foreign currency to support the shekel and provide $15 billion in liquidity to the market through swap transactions.

Official data shows that the central bank spent less than a third of the stated amount - $8.2 billion - during October. The institution still has at its disposal foreign exchange reserves of over 190 billion dollars and executed dollar/shekel swaps of 400 million dollars.

On Tuesday, the shekel returned to its pre-war level of 3.86 units/dollar.

According to Reuters, the government's cost of borrowing, as measured by the benchmark ten-year bond yield, also fell to 4.22%, close to where it was before the attack and well below the peak reached after the outbreak of the war (4.67 %).

"The Bank of Israel has taken very aggressive measures," said Gil Moshe, head of the markets department of the Israel division of the American bank Citigroup, noting: "Whenever market players see that liquidity is where it needs to be, and the Bank of Israel is willing to intervene whenever necessary, they become more confident".

• Yaniv Pagot, Tel Aviv Stock Exchange: "Israeli institutional investors increased their exposure to local stocks and bonds"

Yaniv Pagot, head of trading at the Tel Aviv Stock Exchange, says that Israeli institutional investors who moved their money abroad earlier this year because of concerns about changes to the judicial system have now increased their exposure to stocks and local obligations.

"The institutions are bringing the money back home," said Yaniv Pagot, adding: "They believe that the low shekel is an investment opportunity."

Looking ahead to next year, Shmuel Katzavian, strategist at Discount Bank in Israel, expects the shekel to continue strengthening. The Israeli currency has fallen over the past two years or so as confidence has generally weakened.

MSCI's dollar-denominated index of Israel shares recovered from early losses as it is now down 6.3%, compared with a 15% drop at the end of October.

• Oil prices have returned to the level before the war in Israel

Oil futures fell this week to their lowest level in three months, reversing all gains since Hamas attacked Israel on October 7. The development shows that hedge funds are betting that this conflict will not spread to neighboring countries rich in oil.

The futures price of a barrel of Brent oil for delivery in January 2024 fell by 1.4% in the second part of the day yesterday, at ICE Futures Europe, reaching $80.49. On Nymex USA, the price of West Texas Intermediate (WTI) oil for delivery in December 2023 decreased by 1.6%, to 76.12 dollars per barrel at 08.04 local time.

Thus, crude oil prices are at levels that have not been reached since July.

The Hamas attacks and Israel's subsequent declaration of war have fueled fears of a possible outbreak of a wider conflict that could affect Middle Eastern oil and gas supplies, sending prices up more than 10% to nearly $93 a barrel until the middle of last month.

But, these fears have subsided to a great extent among traders, who believe that the danger of this conflict escalating and attracting countries like Iran is extremely low.

"While the death toll in Gaza, following Israeli airstrikes, continues to rise to unimaginable levels, the prospect of the conflict expanding in the oil-rich part of the Middle East is increasingly close to zero," he said, quoted by the Financial Times , Ole Hansen, Head of Commodity Strategy at Saxo Bank.

Hedge funds are also exiting long positions taken after the war broke out.

After rising above $100 a barrel last year following Moscow's invasion of Ukraine, oil prices have been under pressure for much of 2023, but have had some support in recent months after Saudi Arabia and Russia led the OPEC+ group in the process of reducing production and exports.