Market & Economy
The economic results have not changed much in the recent period, which provided little new information. The Purchasing Managers Index slightly declined last month, but continued to point to an expansion. The Central Bureau of Statistics announced that the business GDP increased by a respectable rate of 3.2% in H2 2012. The Business Trend Review slightly declined but has recorded a positive net balance for 3 months.
However, the foreign trade results showed declines in most of the import and export items, which will require close observation in the coming period.
We estimate that there will not be further decline in the next quarters and the GDP will increase at a reasonable rate.
The Israel Stock Market
The stock indices declined between 0.1% (TA-MidCap) and 5.2% (TA Oil & Gas). The foreign stock indices recorded similar declines. The banks stocks and the oil and gas stocks lagged behind. The second tier stocks declined less than the first tier stocks. The activity was mostly low.
At the end of the financial statements season, the stocks indices are trading in light of the anticipation for the state budget, alongside specific developments, such as regarding Leumi-Ganden or Israel Chemicals-Potash. The absence of an interest announcement this month provides calm in this regard.
The behavior of the stock markets overseas is also at the center of the focus, and so are the security-political events in our region and overseas.
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 0.5% against the USD since the beginning of the month, less than one third than the increase rate of the Euro against the greenback. However, since the beginning of the year the ILS went up approx. 3% against the USD, whereas the Euro went down slightly over 1% against it.
Recently, Bank of Israel (BOI) purchased foreign currency in the sum of USD 100-200 million, but we estimate that this is not a new round. 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 follow the events in the US, in anticipation for the new government budget and the implications thereof on the volume of the issues.
The yield to maturity on zero coupon bonds 414 is 1.66% and does not signal an additional reduction of the interest rate.
0-2 years: nominal ILS bonds with this duration bear approx. 1.68% yield to maturity and reflect a 2.04% increase of the CPI (0.21% below the previous review). This level is slightly higher than our work assumption (2.2%), and notwithstanding estimates that the April CPI will not be unusually high, there is currently slight preference to the CPI-linked channel.
2-5 years: nominal ILS bonds bear 2.27% yield to maturity and reflect a 2.29% increase of the CPI (0.16 below our previous review). This level is slightly higher than our work assumption and the nominal ILS channel has a slight advantage here.
5-10 years: Nominal ILS bonds bear 3.64% yield to maturity and reflect a 2.36% increase of the CPI (0.03% below our previous review). The spread of the yields to maturity from the 10 year treasuries, slightly declined to 1.75% and provides lower protection against 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 5.13% yield to maturity and reflect a 2.59% increase of the CPI (0.02% below 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 the two previous reviews), and does not reflect a high chance for further reduction of the interest rate.
The Tel Bond 20 has added 0.6% since the beginning of the month. The announcement of BOI and the Ministry of Finance on the establishment of a committee for examining the debt arrangements issue and the Leumi-Ganden events may have a material effect of the behavior of this channel in the future.
The picture was mixed: since our last review the spreads from the government bonds declined as follows: in A rated bonds from 2.53% to 2.4%, in AA rated bonds from 0.8% to 0.83%, and in AA+ rated bonds they increased from 0.73% to 0.75%.
Interesting spreads can be found in some of the corporate bonds with the assistance of our list.
The global economic situation continues to be moderate and the results are not uniform. The composite indices of the OECD point to a positive economic turn in most regions, in particular the US and Japan, which is implementing an ambitious integrated expansionary economic policy.
The indices in China and the Eurozone also show signs of improvement, especially in Germany. However, the IMF lowered the estimate of the change in the world GDP in 2013 from 3.5% to 3.3%, and notwithstanding an additional improvement which it recognized in the global economic activity, it indicated that the expansionary policy which is implemented in the developed countries complicates the situation of the developing economies.
We estimate that the increases in the stock markets will renew, thanks to the low interest rates and the economic incentives, but will be quite limited, in the wake of the security tension, the moderate results and the contradicting estimates.
The USD depreciated 1.8% against the EUR since the beginning of the month, while recording significant volatility, still under the impression of the employment data in the US, and a certain calm in the Cyprus issue and the economic environment in the Eurozone.
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 economic results, an increase in the global production, a decline in use in the US and a certain calm in the North Korean issue led to a decline of 8.7% in the crude oil price since the beginning of the month.
Reasonable consumption numbers in the US and estimates that the recent declines were exaggerated may lead to a change of direction in the future.
Notwithstanding the decrease of the USD worldwide, the price of industrial metals further declined 1%-7% since the beginning of the month, similarly to the decline in the crude oil price.
We shall note again that without an actual turn in the global economy, there will be no breakthrough in this sector.