Market & Economy
The economic results are moderate, but with no significant change since the last review. Thus, the Composite State of the Economy Index (BOI) added 0.1% in March, lower than in the first months of the year, whereas the business and companies survey points to a positive net balance in Q1, after 6 quarters in a negative territory. It should be noted that the Purchasing Managers Index points to a slight expansion in the industrial activity, and that the unemployment rate declined to only 6.5% at the end of Q1.
We estimate that no significant slow down will be recorded in the next quarters and that the GDP will increase at a reasonable rate.
The stock market
The stock indices mostly went up last week, led by the TA Banks and TA Real Estate stocks. Most increases were of the second tier stocks, whereas the TA 25 index has not changed. The former has shown a very clear advantage since the beginning of the year.
Towards the earnings season, which, notwithstanding differences between the various companies, will reflect a moderate slow down at the bottom line, the stock market is behaving in the wake of the security-political events, on the one hand (which were reinforced by the events in Syria) and the further increases in the stock markets abroad, which provide tail wind, on the other hand. The activity in the stock market is low.
At this stage we estimate that the activity in the Israeli stock market will continue to be low and the market will trade with no definite direction.
The Forex market
The ILS appreciated 1% against the USD last week, similar to the appreciation of the EUR/USD. Most of the increase occurred in the recent days and BOI, which intervened in the market again, explained that the interest rate in Israel is not low enough to deter foreign residents who take advantage of the spread between the Israeli and other interest rates worldwide.
We estimate that there will not be a new round of intervention by the BOI in the foreign currency market. A challenging budgetary, political and security environment will put the Israeli currency to the test.
In the absence of significant events abroad and an interest decision in Israel, the government bond markets focused on decisions regarding the budget deficit target for 2013 (4.65%) and 2014 (3% of the GDP), and on the effects which they will have on factors such as the inflation rate and the volume of issues in the coming months.
The yield to maturity on zero coupon bonds 414 is 1.64% and is not an indication of an additional reduction of the interest rate.
0-2 years: nominal ILS bonds with this duration bear approx. 1.66% yield to maturity and reflect a 1.92% increase of the CPI (0.12% below the previous review). This level is slightly higher than our working assumption (2.2%), and notwithstanding estimates that the April CPI will be lower than usual, there is currently a (slight) preference to the CPI-linked channel.
2-5 years: nominal ILS bonds bear 2.09% yield to maturity and reflect a 2.16% increase of the CPI (0.13 below our previous review). This level is slightly higher than our working assumption.
5-10 years: Nominal ILS bonds bear 3.31% yield to maturity and reflect a 2.41% increase of the CPI (0.05% above our previous review). The spread of the yields to maturity from the 10 year treasuries declined to 1.61% and provides lower protection against a jump in the yields to maturity overseas. Nominal-ILS bonds have a slight advantage in this duration as well, but its sensitivity to the ambitious budget deficit target for 2014 is high and requires a great deal of caution.
10+ years: nominal ILS bonds bear 4.97% yield to maturity and reflect a 2.53% increase of the CPI (0.06% below our pervious review). The duration risk is significant, especially after the recent increases.
The spread of the yields to maturity between the government floating rate bonds and BOI's zero-coupon bonds is approx. 0.23%, and has not pointed to a reduction of the interest rate for a while.
The Tel Bond 20 has added 0.8% last week. Notwithstanding the developments in the IDB Group and the announcement of the establishment of a committee to examine the debt arrangements issue, the picture is positive: since our last review the spreads from the government bonds declined as follows: in A rated bonds from 2.4% to 2.25%, in AA rated bonds from 0.83% to 0.82% and in +AA bonds from 0.75% to 0.62%.
The global economic situation continues to be moderate but not uniform, which is reflected well in the employment markets: in the US, the addition of vacancies last month was positively surprising and the unemployment rate declined to 7.5% of the civil work force; on the other hand, in the Eurozone this rate soared to 12.1%, and many countries recorded low GDP results.
A slow down is apparent in China as well, but it is moderate at this stage. Japan is waiting to see the effect of the new incentive policy.
We estimate that the increases in the stock markets will continue, in view of further low interests and economic incentives, but moderate results will limit them, all with high volatility.
The USD depreciated 1.8% against the EUR in view of disappointing GDP results in the US in Q1, but the reduction of the interest rate in the Eurozone on Thursday (from 0.75% to 0.5%) and the positive surprise in the unemployment numbers in the US may change the picture in the future.
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
After a continuous decline and in view of the US employment report, the oil price increased to its highest level in the last month.
The security events in our area support the further increases; and on the other hand, quite high inventory in the US and a slight decline in China will limit it.
The price of industrial metals showed a mixed trend last week. Without a significant turn in the global economy and sentiment, there will be no breakthrough in this sector.