Tel Aviv Stock Exchange Plummets as Conflict Escalates Economic Uncertainty Looms

In the wake of a devastating terrorist attack against Israel and Prime Minister Benjamin Netanyahu's declaration of war against Hamas, the Tel Aviv Stock Exchange witnessed a grim start to the trading week. The leading indices suffered significant declines, with Tel Aviv 35 falling by 6.47%, Tel Aviv 125 by 6.69%, and A 90 by 7.86%. The bank index experienced a staggering drop of 8.7%. The opening of the stock exchange was delayed by 10 minutes due to the rapid decrease in values before trading began.

Under the stock exchange rules, if the Tel Aviv 35 index falls by 8%, trading is halted for half an hour, and if it continues to plummet by 12% after resumption, the CEO of the stock exchange has the authority to suspend trading for the rest of the day. These declines were anticipated in light of the ongoing conflict and investors' apprehension about the future. The lingering question now is how much further the stock market will be affected in the days ahead.

Brokers and analysts are predicting a further weakening of the shekel, which had already reached seven-year highs against the dollar last week, peaking at NIS 3.88 during continuous trading. This devaluation is expected to lead to price increases for imported products in the coming days and may necessitate an additional quarter-percent interest rate hike by the Bank of Israel on October 23, pushing it to 5%. However, if the conflict continues and the economy faces partial paralysis, there is a possibility that the central bank will delay the interest rate hike until its final decision of the year in December.

Even before the recent attack, the upcoming weeks in the Israeli economy were poised to be pivotal, with key factors such as the state budget's current deficit, inflation rates, housing costs, and interest levels all under scrutiny. Additionally, the awaited report from international credit rating agency Moody's on the state of Israel is expected to provide valuable insights. An important question remains whether Israel will appoint a new central bank governor or extend the current governor's term amid the ongoing crisis.

Uri Greenfeld, Chief Strategist of Psagot Beit Investments, emphasized the unique impact of the current conflict on the markets, stating, "Unlike previous operations in the south that had minimal effects on the markets, the ongoing war is expected to have a more substantial impact. Markets are fundamentally intertwined with the Israeli economy, and the optimistic scenario of minimal economic damage, as seen in past conflicts, may not hold true this time. Consequently, recovery in the local markets may prove to be a protracted challenge."

Greenfeld advised investors to exercise caution during these turbulent times, stating, "While the immediate outlook for the Israeli market may appear bleak, history has shown that making hasty decisions about long-term savings during such periods often leads to losses rather than gains. Reducing market exposure today might protect against paper losses, but the uncertainty surrounding when to reinvest can ultimately harm savers."