The selloff rocking Israeli markets deepened on Tuesday, with stocks, bonds and the currency all tumbling in the wake of a new law that curbs judicial oversight and heightens concern about the agenda of Benjamin Netanyahu’s government.
(Bloomberg) — The selloff rocking Israeli markets deepened on Tuesday, with stocks, bonds and the currency all tumbling in the wake of a new law that curbs judicial oversight and heightens concern about the agenda of Benjamin Netanyahu’s government.
Morgan Stanley closed a recommendation to buy the nation’s foreign bonds, echoing Moody’s Investors Service in warning of heightened risk as Israel’s government pushes ahead on a legal overhaul. The shekel tumbled for a fourth-straight session against the dollar, underperforming more than 150 currencies tracked by Bloomberg.
“I expect this selloff to continue,” said Saed Abukarsh, Dubai-based chief portfolio manager and co-founder at Ark Capital Management. “Investor sentiment will be heavily impacted given that this will be viewed as an initial step in the total overhaul of the Israeli legal structure.”
The decline in Israel’s assets comes after Netanyahu’s right-wing coalition scrapped a law that allowed judges to void ministerial decisions they considered “unreasonable,” removing a key tool of judicial oversight over elected politicians’ decisions and deepening concern about the country’s $520 billion economy.
The government has vowed to continue its overhaul after a summer recess, even as protesters and opponents say such legislation undermines Israel’s democracy and could imperil its status as a magnet for investment. Hundreds of thousands of people have taken to the streets in protest of the changes.
In a joint statement Tuesday, Prime Minister Netanyahu and Finance Minister Bezalel Smotrich cited growth and opportunity across the nation’s defense, gas and technology industries. “Israel’s economy is based on solid foundations and will continue to grow under experienced leadership that promotes a responsible economic policy,” according to the statement.
That has done little to soothe investors and analysts who worry about a build-up of social and political tensions that stand to boil over into the economy. Moody’s on Tuesday warned that the country’s tech sector, which has become a key engine of economic growth, is already experiencing a hit this year by a retreat in venture capital.
“There is a significant risk that political and social tensions over the issue will continue, with negative consequences for Israel’s economy and security situation,” Moody’s analysts including Kathrin Muehlbronner wrote in a report. “The executive and legislative institutions have become less predictable and more willing to create significant risks to economic and social stability.”
The law’s passage also stands to embolden Netanyahu’s government in its next steps toward the overhaul, according to Morgan Stanley economist Georgi Deyanov and strategist Pascal Bode, who adopted a “dislike” stance on Israel’s sovereign credit and abandoned a recommendation to buy the notes.
“Recent events point to continued uncertainty and thus the potential for an increased risk premium that would lead to weakening FX and higher borrowing costs,” they wrote in a note. “Investors will now find it more difficult to develop a constructive view, leaving risk assets without a clear anchor.”
Evidence of that is already forming in markets. The shekel dropped 1.4% to 3.7083 per dollar as of 1:25 p.m. in New York, on pace for its worst losing streak since the end of June. The currency’s one-month implied volatility has jumped by the most in over a year in the past two sessions.
A key equity benchmark, meantime, dropped about 3%, the most since March on a closing basis. The nation’s international debt due in 2033 has slipped this week to about 97 cents on the US dollar, according to indicative price data compiled by Bloomberg.
“Netanyahu has drawn this process out and so tensions will likely get worse,” said Win Thin, global head of currency strategy at Brown Brothers Harriman & Co. “There will be significant economic costs as protests continue.”
–With assistance from Zijia Song, Sunil Kesur and Galit Altstein.
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