Markets Eye US Rate Shift and Earnings as Tel Aviv Stocks Face Pressures
US rate expectations shift as soft jobs data takes an October hike off the table. Meanwhile, Tel Aviv markets face geopolitical headwinds and high financing costs.
The new trading week opens with a dramatic shift in US interest rate expectations, following the latest employment report—along with a lower-than-expected PCE inflation reading—which has effectively taken another rate hike off the table for October. This development comes shortly before the third-quarter earnings season begins next week, kicking off with reports from major US banks.
This development is also crucial for the local market, as interest rate differentials with the US make it difficult for the Bank of Israel to resume its rate-cutting path, which is particularly vital for leveraged real estate companies.
The employment report ignited a Wall Street rally late last week, but two factors that have recently weighed on stock indices—bond yields and oil prices—remain at elevated levels. The Nasdaq climbed to a new record, and the S&P 500 is not far from its peak, yet analysts agree that beneath the surface, a quiet erosion is taking place in the stock market.
Macro Calendar and Central Bank Signals
The central macroeconomic event of this week will be the release of the Federal Reserve’s minutes from its last Open Market Committee meeting in September, scheduled for Wednesday evening. Investors will scour the publication for hints regarding the future path of monetary policy. On Monday, the ISM and S&P Global purchasing managers' indexes for the services sector will be released.
Dual-listed stocks are set to return from Wall Street with a slight positive arbitrage gap of about 0.2%. Notable gainers will include dual-listed chipmaker Camtek and geothermal energy firm Ormat Technologies, both posting gains of over 3%. Enlight Renewable Energy and Elbit Systems are expected to climb by more than 1%. Conversely, Palo Alto Networks—which made history last Thursday by becoming the first company in Tel Aviv to cross a market capitalization threshold of 1 trillion shekels—will shed over 1%.
The Tel Aviv Stock Exchange closed the past trading week in the red. The TA-35 index weakened by about 0.6%, the TA-90 index retreated by about 1.1%, and the TA-125 index pulled back by about 0.7%.
Local Market Trends and Geopolitical Pressures
Except for the technology index, which climbed by about 1.2% due to gains in semiconductor and AI stocks on Wall Street, all major sectoral indices ended the week in negative territory. The Tel Aviv Oil and Gas index stood out negatively, plunging by about 3%, partly due to declining global oil prices; the construction and real estate indices lost over 2%.
Leading the gains in the TA-125 index was El Al, which recorded a weekly surge of over 15% against the backdrop of the terrorist attack on a Flydubai flight and reports that it will resume its routes to Dubai following the incident. The surge could secure it a spot in the TA-35 index for the first time in its history. Israir shares also climbed by over 1%.
Dr. Ilan Gildin, partner and hedge fund manager at Karni Family Office, noted in his weekly review that local stock indices have lagged behind leading global indices in recent months, "as a result of a combination of macroeconomic constraints and security and political uncertainty."
The regional conflict and tensions with Iran continue to dampen the risk appetite of foreign investors. Alongside this, the high interest rate differential against the dollar, coupled with sticky local inflation influenced by global input prices and the depreciation of the shekel, prevents the Bank of Israel from renewing its rate reduction path. Heavy financing costs and weak demand also burden leveraged real estate companies, a sector that holds significant weight in the local debt and equity markets. Furthermore, the close timing of the general elections in Israel complicates the formulation of a restrained budget and delays critical fiscal decisions.
Global Markets, Crypto, and Bitcoin Forecasts
In New York, despite Friday's rally, Wall Street wrapped up the week on a mixed note. The S&P 500 fell by about 0.3%, the Nasdaq climbed by about 0.4% to an all-time high, and the Dow Jones weakened by about 1.3%.
Semiconductor stocks maintained their positive momentum. The SOXX exchange-traded fund rose by about 2.8% last week, marking its fifth consecutive green week; overall, it has climbed by about 15% over the past five weeks. Chip giants NVIDIA and AMD surged to new all-time highs.
As noted, Friday's gains were driven by the employment report, which dramatically lowered the probability priced in by markets for another rate hike in October. Saira Malik, chief investment officer at Nuveen, told CNBC that the report could provide the market with support heading into the earnings season, which she expects to be "very strong."
While Wall Street's gains strengthened the shekel this past Friday, on a weekly basis, the Israeli currency weakened slightly against the dollar, with its continuous rate settling at 3.05 shekels. Meanwhile, the DXY dollar index, which measures its global strength, jumped by about 1% last week to a level of 101.9 points—a high of about a year and a half. This came amid market expectations that US interest rates will continue to climb, albeit at a slower pace than anticipated a week ago.
From the shekel's perspective, for now we are seeing relative resilience despite the strong dollar, rising global yields, and tensions in the energy markets. The coming week will continue to be influenced primarily by US yields, oil prices, and data that will provide further insight into economic activity and inflation rates.
In the oil market, Brent crude climbed by about 3.5% last week to settle at $102 a barrel, while WTI crude dropped by about 1.4% to close at $91 a barrel. Prices declined on Friday after G7 nations announced they would release 100 million barrels of diesel from their reserves over the next four months.
In the crypto market, Bitcoin continues to hold firm around the $85,000 level per coin. Investment bank Citi significantly upgraded its 12-month forecast for the cryptocurrency at the end of the week, raising it from $82,000 to $113,000. Citi cited stronger crypto activity, a supportive macroeconomic backdrop, and a return of capital flows into spot exchange-traded funds tracking the coin.
Bond Yields and Bank of America's Warning
As noted, the September employment report came in much colder than expected, with the addition of 29,000 jobs—a significant drop compared to expectations of about 100,000 jobs, and down from the 133,000 recorded in August. The unemployment rate ticked up by 0.1 percentage points to settle at 4.2%.
Initially, US government bond yields reacted to the report with declines, but shortly thereafter they reversed course and resumed climbing, remaining at multi-decade highs. The 10-year yield rose by over 4 basis points to 5.27%, the 30-year yield climbed by nearly 3 basis points to 5.63%, and the 2-year yield rose by nearly 4 basis points to 4.82%.
Another red flag is close to igniting in the markets. Bank of America's sell-side indicator, which tracks the average recommended stock allocation among Wall Street strategists, climbed in September to 57.2%—the highest level since March 2022 and within 0.3 percentage points of entering a "sell signal."
This is a contrarian indicator, meaning that when it climbs to extreme levels, it reflects excessive optimism and market crowding, signaling that investors should swim against the current. According to Bank of America, in previous instances when a sell signal was triggered, the S&P 500 recorded an average gain of 3% over the following 12 months—below the historical average of about 10%.
