Israel’s Too-Strong Shekel Shows Investors Unshaken

For perhaps the best sign of how it’s been business as usual in Israeli markets since the fighting broke out in Gaza, look no further than the shekel.

It has proven so resilient, hovering near a three-year high even as emerging-market currencies plunged 1.7 percent on average over the past month, that Israeli central bankers intervened in the foreign-exchange market on Aug. 7, buying dollars to weaken it by the most in 11 months.

The story has been much the same in other Israeli assets, with both stocks and bonds gaining. The TA-25 index advanced 1.2 percent in the past month, dodging a slump in global equities that’s driven down the MSCI World Index 2.1 percent. A second three-day truce in the past week began last night, halting renewed strikes. The month-long conflict is doing little to hurt investor confidence in Israel, said Michael Shaoul at Marketfield Asset Management LLC in New York.

“You’ve had many decades of turbulence in that part of the world, and no clear correlation between turbulence and equity-market performance,” Shaoul, who oversees $20 billion in assets as chief executive officer at Marketfield, said by phone from New York. “There’s no clear evidence that markets really care about this stuff.”

The bond market rally has pushed yields on Israel’s benchmark 10-year local debt down 15 basis points, or 0.15 of a percentage point, to 2.71 percent in the past month. While investor expectations for shekel fluctuations have increased, it’s the second least volatile among eight currencies in the region tracked by Bloomberg.

Growth Outlook

The Tel Aviv index of stocks gained 0.3 percent at 4:14 p.m. in Tel Aviv.

Three-month implied volatility on the shekel increased to 5.75 percent last week from a nine-year low of 4.29 percent on July 4. That compared with 11.2 percent in the Russian ruble and 10.4 percent in the Turkish lira.

Capital keeps pouring into Israel, bolstering the shekel, in part on speculation that the discovery of offshore natural-gas fields will transform the nation into a fuel exporter. The central bank intervened last week as part of an effort to weaken the shekel and shore up the country’s exports of everything from diamonds to military drones.

“The strength of the shekel is long term,” Ishitaa Sharma, an emerging-markets trading strategist at Citigroup Inc., said by phone from London on Aug. 8. Opportunities in the natural gas industry make “Israel attractive for foreign investment.”

Cutting Rates

Israel’s economy is forecast to grow 3.3 percent this year, almost double the pace of growth in the U.S., according to the average estimate of economists surveyed by Bloomberg.

While financial markets have shrugged off the fighting in Gaza, the conflict is starting to take a toll on growth, said Daniel Tenengauzer, the New York-based head of emerging markets and global foreign-exchange strategy at RBC Capital Markets LLC.

The central bank, led by Governor Karnit Flug, unexpectedly lowered the benchmark interest rate to 0.5 percent on July 28, citing concern that the offensive in Gaza could shave as much as 0.5 percent off growth this year.

The cost of the incursion, coupled with its impact on the economy, may cause the government to narrowly miss its budget deficit target this year, Fitch Ratings wrote in an Aug. 7 report.

“This conflict has gone on long enough to dent activity, which is going to have an impact on fiscal revenues,” Tenengauzer said by phone Aug. 8. “If these guys need to raise taxes, they will.”

Truce Holds

Palestinian envoys attending truce talks in Cairo agreed yesterday to Egypt’s proposal for 72 hours of quiet. There were no rockets fired from Gaza or Israeli air strikes on the territory since the cease-fire went into effect at midnight, the Israeli army said.

Fighting over more than four weeks has killed more than 1,900 Palestinians, according to Gaza’s Health Ministry, the majority of them civilians. Sixty-seven people have died on the Israeli side, all but three of them soldiers.

The Bloomberg Israel-US Equity index fell less than 0.1 percent to 117.56 last week, following a 1.8 percent drop in the prior five-day period. It’s up less than 1 percent since the start of the conflict. CaesarStone Sdot Yam Ltd., the maker of quartz counter-tops, rallied 20 percent last week after issuing new full-year sales estimates that surpassed analysts’ expectations.

“The market’s basically saying it doesn’t, at this point, discount any future significant impact on corporate earnings,” Shaoul said. “This is unfortunately not the first conflict and probably won’t be the last.”

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