Israel Stocks, Bonds Gain on Bets Coalition to Tackle Economy

Israeli stocks advanced the most in two weeks and bonds rose as investors bet Benjamin Netanyahu’s new coalition would weaken ultra-Orthodox factions as the nation seeks to narrow its budget deficit.

The benchmark Tel Aviv 25 Index of equities advanced 1 percent, the most since Jan. 10, to 1,204.65 at the close in Tel Aviv, as Israel Chemicals Ltd., Israel Corp. and the country’s three largest banks led gains. The yield on the 4.25 percent benchmark government bonds due March 2023 dropped 5 basis points, or 0.05 percentage point, to 4 percent. The shekel gained for a second day versus the dollar. The Bloomberg Israel-US Equity Index of the largest U.S.-traded Israeli companies added 0.1 percent to 86.08 at 10:23 a.m. in New York.

Israeli voters gave Netanyahu the chance to serve a third term as prime minister with a weaker mandate than four years ago, leading him to seek an alliance with centrist Yair Lapid’s Yesh Atid party, which took the second-most seats. The party campaigned on the need to trim housing costs and draft ultra-Orthodox Jews into the army.

“The market likes the fact that a new government could be formed in which the power of the ultra-orthodox is weakened, making Netanyahu less subject to sectoral party demands,” Shuki Arditi, head of trading at Leader Capital Markets in Tel Aviv, said today by phone. “There is an option to form a liberal government that supports a shared burden and fiscal responsibility.”

The shekel strengthened 0.2 percent to 3.7253 per dollar at 4:39 p.m. in Tel Aviv.

Three Priorities

Netanyahu said today he will work quickly to form a new coalition. The new government will have three priorities, cutting home costs, limiting draft deferments and implementing structural reforms, Netanyahu said in comments broadcast on Army Radio.

One-year interest-rate swaps, an indicator of investor expectations for rates over the period, fell two basis points to 1.71 percent. The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, was little changed at 281.81.

Netanyahu’s combined ticket with the Yisrael Beitenu party won 31 seats in the 120-member Knesset, according to the Haaretz website, down from 42 in the current parliament. The prime minister said the deficit should be reduced to 3 percent of economic output this year from 4.2 percent in 2012, requiring 14 billion shekels ($3.8 billion) in spending cuts. He called the election a year ahead of schedule after failing to get coalition partners to agree on the measures.

“The market likes the fact that Netanyahu will be the presumed prime minister,” Zach Herzog, head of international sales at Psagot Investment House Ltd., said today by phone. “Investors know he will be working on decreasing the deficit and maintaining Israel’s fiscal credibility.”

Enacting a budget for 2013 remains the key near-term challenge for any new Israeli government that emerges after the elections, Fitch Ratings said today.

Yesh Atid’s Lapid, 49, told supporters at his own rally in Tel Aviv that he hoped to “unite the moderate forces from the right and the left so that we can bring about a real change.”

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