Market & Economy
The economic results are moderate, the foreign trade results point to weakness in the industrial production and private consumption, although companies are still purchasing vehicles, machines and equipment.
The Consumer Confidence Index reflects hesitance of the households, which are preparing for a decline in the available personal income, in view of the recent tax increases.
The net business activity balance decreased in the last month, but remained positive. In the labor market – there is no change in the salary and the number of vacancies.
We estimate that no significant slow down will be recorded in the next quarters and that the GDP will increase at a reasonable rate. According to the OECD the GDP will go up by
3.4%-3.9% this year and in the next year; a reasonable rate considering the market's abilities.
The Stock Market
The stock indices inclined downwards last week, especially the second tier stocks, and the banks and real estate stocks. Declines overseas (especially in Japan and in emerging markets) and the non addition of Israel to the MSCI Europe index, were the reason for it, together with moderate market results.
The activity in the stock market, which, commencing from June 17, will be extended by one hour every day, will face the security and political question marks, the fluctuations in the stocks overseas and the low activity.
At this stage we estimate that the Israeli market will continue to trade with no definite direction.
The Foreign Currency Market
The ILS appreciated 1.3% against the USD, and returned to the 3.60 level. As such, the USD depreciated against the ILS slightly more than its depreciation against the Euro. In this respect, the effect of the second reduction of the interest rate by the BOI almost dissipated.
BOI's high level of activity, both in terms of interest rate and purchase of foreign currency, will continue to limit appreciation in the ILS rate against the USD in the coming future.
The government bond markets were not impressed by the 0.5% decline of the interest rate last month and focused on the significant increase (until 2-3 days ago) of the US yields to maturity, and on BOI's warnings regarding the difficulties which the state budget will face in 2015 and thereafter.
The yield to maturity on zero coupon bonds, which is 1.28% against 1.30% in the previous review, does not signal a further reduction of the interest rate, but in view of the CPI for May, which went up only 0.1%, one third of the prior estimates, its response is anticipated at the beginning of the week.
0-2 years: nominal ILS bonds with this duration bear approx. 1.31% yield to maturity and reflect a 1.91% increase of the CPI (0.01 below the previous review). This level is lower than our work assumption (2.2%), and reflects a slight preference for the CPI-linked channel.
2-5 years: nominal ILS bonds bear 2.26% yield to maturity and reflect a 2.14% increase of the CPI (0.20 below the previous review). This level is slightly lower than our work assumption, but does not grant an actual advantage to any of the channels.
5-10 years: Nominal ILS bonds bear 3.76% yield to maturity and reflect a 2.52% increase of the CPI (0.07 above the previous review). The spread of the yields to maturity from the 10 year treasuries rose to 1.62%, but still provides low protection against jump in the yields to maturity overseas.
Nominal-ILS bonds have a slight advantage in this duration, but their sensitivity to the ambitious budget deficit target for 2014 is high and requires a great deal of caution.
10+ years: nominal ILS bonds bear 5.08% yield to maturity and reflect a 2.52% increase of the CPI (0.01 below the previous review). The duration risk is currently very high.
The spread of the yields to maturity between the government floating rate bonds and BOI's zero coupon bonds is 0.21% (0.14% in the previous review), and does not reflect a chance for a reduction of the interest rate.
The Tel Bond 20 declined 0.6% last week, in view of the declines in the stock market. The
channel continued to respond to the news/estimates regarding debt arrangements for
Israeli companies and in addition, the supply increased recently.
Since our last review, the spreads from government bonds declined: in A rated bonds from 2.84% to 2.62%, in AA rated bonds 0.90% and in +AA bonds from 1.13% to 0.97%.
The various bonds can be examined with the assistance of our list.
The global economic situation continues to be moderate and the recent estimates by the OECD and the IMF are not optimistic.
However, the Composite OECD Index for May showed improvement in most developed countries, first in the US and Japan, but in the Eurozone as well (Germany is leading, no change in France, and encouraging signs in Italy). Britain and Canada with no further momentum.
There is no additional deterioration in China and Brazil, but Russia loses momentum and India shows signs of weakness.
We estimate that in the near future there will be high volatility in the stock markets, which declined recently; on the one hand, low interest rates and economic incentives will continue to give them tailwind, but on the other hand, the economic results in many places worldwide are not good enough in order to push them forward.
The EUR appreciated 0.8% against the USD last week, but no conclusion can be drawn from it regarding the future, since the results in the continent have not improved enough and the interest rate there may be reduced again.
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
The oil price went up 4.5% since the beginning of the month, in view of significant depreciation in the USD rate against the Euro and the tension in the Middle East.
Weighing against these factors, we can see a certain slow down in China, but it seems that the recent increases will not be reversed soon.
The price of industrial metals declined approx. 3% since the beginning of the month, and
approx. 11% since the beginning of the year.
Data coming from China reversed last month's recovery. Without a significant turn in the global economy and sentiment, this sector will continue to tread water with no breakthrough.