The market sees the war ending soon

The IDF’s series of successes in the war against Hezbollah, led by the killing of the group’s leader Hassan Nasrallah last Friday night, are the main reason for yesterday’s surge in the Tel Aviv stock market, said IDF founder and chief executive officer. Chairman Zvi Stepak said. Maytab Investment House. The Tel Aviv 35 index rose 1.02% yesterday, after rising about 5% last week when a series of dramatic attacks against Hezbollah began, but retreated slightly in early trading today.

In an interview with Globes, Stepak expressed surprise that despite Moody’s doubling of Israel’s credit rating on Friday, yields on Israeli bonds actually fell. That’s what I’m doing. Stepak expects that even if the war in the north ends sooner than expected, it will take time for credit ratings to be raised again.

“While the market has brushed aside Moody’s announcement, there is a need to differentiate between the stock market and the bond market,” Stepak said. “In the short term, the impact of Moody’s downgrade should be felt on the bond market and, indirectly, on the stock market.”

In his view, what drove up the stock price was “our success in the war against Hezbollah, including the assassination of Nasrallah. That is more closely related to the stock market. From that perspective, the stock price I’m not surprised it went up.”The stock market went up. ”

why?

“Because the fear that was prevalent even a month or two ago, even years ago, about a war with Hezbollah, which had 150,000 missiles and so on, has been significantly reduced or diminished. In that sense, Hezbollah’s capabilities are limited at the moment, and there are concerns about damage to energy infrastructure, for example, and as far as investors and markets are concerned, we are currently seeing a surge in oil and gas stocks. The serious damage to the Israeli economy has diminished.”

What else is affecting the stock market?

“The market is predicting that the war will probably be shorter than we thought. This not only affects the stock market, but also the bond market in this context, because the market predicts that the war will last longer. Predictably, a shorter period would reduce pressure on defense budgets, budget deficits, governments, etc., and in some ways help offset last weekend’s dramatic credit downgrade by Moody’s. Dew.”

In general, most government bond indexes are rising despite rating downgrades. Does it surprise you?

“I was surprised by the situation in the bond market. I wouldn’t have been surprised, for example, if Moody’s had downgraded Israel by one notch and kept the rating outlook negative. Despite this, the rating was still unchanged.” Since the outlook is negative, a rise in yields (and a fall in prices) on Israeli government bonds may have been expected. ”

However, it is still too early to celebrate. “More importantly, foreign investors see things differently, so we’ll see what happens around the world[in the run-up to Monday’s trading open],” Stepak said. “As far as we are concerned, Israeli bonds are debts that the government pays us. But foreign investors invest in different countries with their own rating criteria and not in others. There are investment committees in pension funds, universities, etc., and some of them are nervous[about investing in Israel]even though Israel is still rated investment grade. Probably.

“There is no reason for an ETF that invests in sovereign debt to sell Israeli bonds because Israel is still part of an investment grade index.At this point, there is no reason to sell unless it falls below investment grade.”

There is no paradise

Even if the war with Hezbollah turns out not to be as bad as we feared, defense spending is still scheduled to increase. Won’t that deter investors?

“There are known permanent things that will remain with us for years to come: defense spending, weapons purchases, but also aid through subsidy packages from the United States. Defense spending will increase regardless of war. They talked about things like: “The defense budget will increase, at the expense of civilian services that everyone uses, such as education services, health care, and welfare, some of which will probably include value-added taxes. Also included.

“In the real economy, it will not be paradise. It will be tough. It will affect the profitability of companies and the impact on the stock market may return. But the sooner the war ends, the more Currently, the Bank of Israel’s interest rate is stable, but if the price of Israeli government bonds falls and the risk premium increases, a scenario in which the Bank of Israel’s interest rate rises, although not imminent, is likely. Even. interest rate.

“However, assuming the war does not last very long and Iran does not join the conflict, the economy will face difficult challenges in the coming years, but in such a situation interest rates will fall. It would make things easier for them.”In general, even if the war ended quickly, the need for a defense budget against Iran would still remain, so the need would not go away, but the move would make it possible. will be possible. The economy will gradually recover. The boom may be in the stock market, not the real economy.”

When will Israel’s credit rating rise again?

“Moody’s has downgraded its credit rating. The other two agencies have not downgraded it yet. Their rating for Israel is higher. Moody’s justifies the double downgrade for two reasons. One is geopolitical Moody’s doesn’t know much more than that.”But if the war were to end tomorrow, even though it is true that defense spending remains high, Moody’s would not support that argument.” lose.

“The second argument is the Treasury Department’s problematic behavior. Moody’s doesn’t believe the Treasury’s budget deficit forecast for this year. We also don’t believe the Treasury’s forecast that the budget deficit will be 4% in 2025, not 6%. We’re talking about a ‘deficit,’ so it depends on how the government acts.

“That will be key to how the Israeli bond market behaves, whether the budget will be managed responsibly, and whether a budget with spending cuts will be passed, which is by no means certain. What is clear from the Moody’s report is that the authorities have lost faith in and no longer trust Treasury decision-makers. Anything more than that and they won’t hesitate to turn the negative outlook into a downgrade, which would put us in a very problematic scenario. ”

What if there is a further downgrade by Moody’s?

“Such a downgrade could lead to a rise in yields that would push up short-term interest rates. That’s not a scenario that anyone wants. Even if the war is short-lived, Moody’s will take the following actions: We do not intend to upgrade the rating, we will probably withdraw the negative rating outlook and then consider an upgrade, and we will not upgrade the rating. Even if they think they should raise their rating, they won’t raise it right away and will wait longer. ”

Published by Globes, Israel Business News – en.globes.co.il – on September 30, 2024.

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