Israeli shares slide and the shekel weakens amid fears of a retaliatory Iran attack
Major indices drop as investors weigh the threat of a wider and longer regional war; S&P warns of potential escalation risks and the impact on the country’s credit rating
Sharon Wrobel is a tech reporter for The Times of Israel.
Shares on the Tel Aviv Stock Exchange tumbled for a second day and the shekel slid, with Israel on high alert for a possible large-scale retaliatory attack from Iran following the assassinations of Hezbollah military chief Fuad Shukr in Beirut and Hamas leader Ismail Haniyeh in Tehran.
The Tel Aviv Stock Exchange’s benchmark TA-125 index and the TA-35 index of blue-chip companies dropped as much as 2.5% early Monday amid fears of an escalating regional conflict. The TA-Dual Listing index dived 3.3%. Share declines moderated in early afternoon trading with the TA-125 down 1.5% and the TA-35 declining 1.7% amid reports that Iran is signaling it wants to avoid all-out war with Israel.
The shekel fell for a sixth day and was at 3.83 per dollar trading around its weakest level since November, as both Iran and Hezbollah have vowed revenge for the killings of Hamas and Hezbollah senior figures.
Meanwhile, Asian shares opened the week on Monday in the red with the MSCI Asia Pacific Index more than 6% over concerns of a looming deepening slowdown in the US economy.
“The local market is very nervous, affected by the global market downturn as well, but more so by the heightened rhetoric about an imminent Iran attack pushing Israel’s country risk premium higher,” IBI investment house chief economist Rafi Gozlan told The Times of Israel. “The market is pricing in a downside risk of a possible regional escalation amid fears that situation could spiral out of control and last more than a couple of days.”
The local currency last week depreciated 3.8% against the dollar and 3.2% against the euro as Iran and the Palestinian Islamist terror group Hamas blamed Israel for a blast early Wednesday morning that killed Hamas leader Haniyeh in Tehran. His assassination came just hours after a strike claimed by Israel killed Iran-backed Hezbollah military chief Shukr, on Tuesday evening near Beirut. Israel has claimed responsibility for killing Shukr but has not officially commented on Haniyeh.
Last week, the TA-35 and TA-90 indices dropped by about 3.2% and 7.1%, respectively, while in the US, the Dow Jones and the S&P 500 indices were up about 2.3%, according to data by the Tel Aviv Stock Exchange.
Ratings agency S&P Global warned late on Thursday that the “risks of escalation are on the rise” following the assassinations.
“It is difficult to reliably quantify the effect of a potentially broader regional conflict on Israel’s economic, fiscal, and balance-of-payments performance,” said S&P. “We nevertheless anticipate that it could be pronounced.”
“We consider that the risk of an accident or miscalculation remains even if Israel, Iran, and Hezbollah do not specifically intend to escalate,” the ratings agency cautioned.
Back in April, S&P joined Moody’s Investors Service in cutting Israel’s sovereign credit rating by one notch citing regional tensions with Iran and expectations of a longer than previously estimated war with Hamas, which broke out in the aftermath of the October 7 onslaught by the terror group on Israel’s southern communities.
S&P kept its negative outlook on the Israeli economy, which opens the door for more downgrades down the line as the country could face higher military and civilian war spending, and global market sentiment turns sour.
“Potential escalation scenarios are not part of our baseline ratings scenario for Israel and could present additional credit risks if they were to materialize, which are reflected in the current negative outlook on our ‘A+’ long-term ratings for Israel,” S&P warned. “If the ongoing conflicts widened further across the region, for Israel the effects of the remobilization of reserves, the additional displacement of residents, and a disruption to education, could weigh more acutely on consumer and business sentiment, production, and investments as well as fiscal performance.”
Economists at Bank Hapoalim said that waiting for a counterattack by Hezbollah or Iran increased Israel’s risk premium and weakened the shekel.
“At the same time, expectations for a slowdown in the global economy, and perhaps even a slide into a recession, increased,” Hapoalim said in a note to investors. “The trend in the stock market has reversed and all this is bad news for the local economy, and especially for the shekel exchange rate.”
The US and Europe are Israel’s largest trading partners. The economic fallout from the months-long war with Hamas and the downturn in private consumption and investment in sectors such as construction are already hampering vectors for growth.
“The economic indicators point to slow growth in the second quarter of the year,” said Hapoalim. “Security tensions alongside a high level of uncertainty are expected to weigh on third-quarter economic data as well.”
Bank Hapoalim expects the economy to grow at a rate of less than 1% this year, lower than the central bank’s projection of 1.5%.
Agencies contributed to this report.
