Israel’s Shekel Hits Lowest Level Since 2016 as Conflict Intensifies
Israel on High Alert as Hamas Attack Sparks Volatility
Israel’s shekel reached its weakest point since early 2016, while the cost of insuring the country’s sovereign debt against default skyrocketed on Tuesday. This follows a violent assault by Hamas militants over the weekend, which has put Israel on high alert and raised concerns about a potential war.
Shekel Weakens Amid Escalating Tensions
The shekel weakened by 0.4% in early trading, hitting 3.9544 to the dollar. This decline follows Monday’s significant drop of over 2.5%, marking the largest one-day move since March 2020. The currency has now depreciated by 11% in 2023.
Surge in Credit Default Swaps
Additionally, five-year credit default swaps, which offer protection in the event of bond issuer defaults, have surged to 93 basis points. This is a substantial increase from the previous close of 60 bps on Friday, according to data from S&P Global Market Intelligence.
Mounting Concerns over Prolonged Conflict
The recent weekend attack and subsequent retaliatory strikes by Israel have resulted in a death toll of over 1,500 people. This has raised fears of an extended period of conflict and violence in the region. As a result, stocks, bonds, and currencies of Israel and neighboring countries such as Lebanon, Jordan, and Egypt have come under severe pressure. To stabilize the currency, the Bank of Israel announced plans to sell up to $30 billion of foreign currency in the open market.
Bond Market Volatility
Israel’s longer-dated international bonds experienced some gains, with the century bond maturing in 2120 rising by nearly 1 cent, according to Tradeweb data. However, this only partially offset the more than 4 cent fall observed on Monday. Shorter-dated bonds continue to face pressure and see extended declines.
Investment Strategies Adjusted
JPMorgan has responded to the current backdrop by reducing its overweight position on select Israel corporate bonds to a neutral weight. They have also taken similar actions on debt issued in other Gulf Corporation Countries. Zafar Nazim from JPMorgan stated that advising investors to add bonds in the current situation would not be prudent.
Market Rebounds Amidst Volatility
Despite the recent market turmoil, key Tel Aviv share indexes showed a 0.5% increase, building on the gains from the previous day. However, this comes after a significant drop of over 6% on Sunday.
In conclusion, Israel is currently facing heightened tensions and volatility in various sectors due to the recent Hamas attack. The shekel’s decline and the surge in credit default swaps reflect the market’s response to the escalating conflict. It remains to be seen how the situation will develop and how it will impact Israel and the surrounding region.