April 7, 2013
Market & Economy
The recent economic results continue to paint a general moderate picture, but with no further deterioration, and they even show a number of signs of recovery.
The Bank of Israel estimates that the GDP in Israel will increase this year slightly less than 3%, after the deduction of the natural gas factor, and that the unemployment rate will be 6.5%, an impressive result compared with the Eurozone number, which is 12%.
We estimate that no further slowdown will be recorded in the next quarters, and the GDP will increase at a reasonable rate.
The Stock Market
The stock indices recorded declines (up to 1.5%) since the beginning of the month, but were lower than the declines of most indices overseas. The banks and technology stocks lagged behind and no significant difference between the first and second tier stocks was recorded. The activity was low in view of the holidays and in general.
Upon the end of the financial statements season, the behaviour of the stock indices will be affected by the macro-economic results, and the proposal of the state budget, including the income and expense side. The absence of an interest announcement this month will create calm in this regard.
The behaviour of the stock markets overseas will also be at the centre of things, and naturally, the various security and political tensions, both in our area and overseas including North Korea and Iran etc.
At this stage we estimate that the Israeli stock market will have no definite direction and there may be high volatility.
The Forex Market
The ILS appreciated 0.6% against the USD since the beginning of the month, lower by half than the rate of the EUR increase against the USD. However, since the beginning of the year the ILS increased approx. 3% against the USD, whereas the EUR decreased almost 2% against it.
Recently, there have been estimates that the Bank of Israel will continue to purchase foreign currency, but we are of the opinion that it will not necessarily be so, and the direction may change. A challenging budgetary, political and security environment will put the Israeli currency to the test.
With no interest announcement this month, the government bonds will be affected by the events in the US, concurrently with the 135 days of anticipation for the new government budget and the implications thereof on the volume of the issues.
The yield to maturity on zero coupon bond 414 is 1.7% and does not point to an additional reduction of the interest rate.
0-2 years: nominal ILS bonds with this duration bear approx. 1.72% yield to maturity and reflect a 2.25% increase of the CPI (0.05% under the previous review). This level is slightly higher than our work assumption (2.2%), but in view of estimates that the March CPI will be low, the nominal ILS channel is slightly preferable.
2-5 years: nominal ILS bonds bear 2.46% yield to maturity and reflect a 2.45% increase of the CPI (as in our previous review). This level is slightly higher than our work assumption and therefore the nominal-ILS bonds have a slight advantage here as well.
5-10 years: Nominal ILS bonds bear 3.64% yield to maturity and reflect a 2.39% increase of the CPI (as in our previous review). The spread of the yields to maturity from the 10 year treasuries slightly increased to 1.84% and reflects limited protection from jump in the yields to maturity overseas.
Nominal-ILS bonds have a slight advantage in this duration as well, but the profitability of the duration will be largely affected by the extent of the deficit in the 2013-2014 budget.
10+ years: nominal ILS bonds bear 5.23% yield to maturity and reflect a 2.61% increase of the CPI (same as in our pervious review). The duration risk is significant, and in view of the budgetary question marks, this channel is not recommended.
We estimate that the bond market will wait for the new budget, and in view of the interest rate remaining the same, the yields to maturity in the US will be observed. In the future, the indices may begin to rise rapidly and enter into the equation.
The spread of the yields to maturity between the government floating rate bonds and BOI's zero-coupon bonds is approx. 0.2% (as in our last review), and does not reflect a high chance for further reduction of the interest rate.
The Tel Bond 20 has increased 0.1% since the beginning of the month. The situation was mixed: since our last review the spreads from the government bonds declined as follows: in A rated bonds from 2.7% to 2.53%, in AA rated bonds they remained 0.8% and in AA+ they decreased from 0.8% to 0.73%.
Interesting spreads can be found in some of the corporate bonds with the assistance of our list.
The general global situation continues to be moderate and the results are not uniform. Thus, in the US, the employment rates were disappointing – only 88,000 new vacancies in the last month, but on the other hand, the consumer credit went up 7.8% in February – the highest increase for 6 months.
In the Eurozone, in the wake of the events in Cyprus and Italy, it was reported that the unemployment rate went up to 12% and heavily weighs on the economic-and social situation in the continent.
In Japan, the new governor of the central bank announced broad monetary incentives, and brought about an outburst of optimism in the stock markets, although it was partly offset by aggravation in the tension with North Korea.
We estimate that the increases in the stock markets will continue, but will be quite limited, due to the security tension and the moderate results.
The USD depreciated 1.4% against the EUR since the beginning of the month, in the wake of the disappointment of the employment results in the US, and in view of the promise of the Governor of the ECB that he would take measures if the difficulties in the Eurozone continue.
There is no change in our estimate that the USD/EUR rate will range from 1.25 to 1.35, around the mid-range.
Oil and oil products
Moderate global economic results, increase in the supply in the US and a decrease in the demand estimates of the International Energy Agency led to a decrease of 4% in the crude oil prices since the beginning of the month, which was not disturbed so far by the tension with North Korea.
However, the encouraging consumption results in the US and the calm regarding the Cyprus issue may cause the direction to change in the future.
Notwithstanding the decrease of the USD worldwide, the price of industrial metals further declined 1%-2% since the beginning of the month.
We shall note again that without an actual turn in the global economy, there will be no breakthrough in this sector.