(Bloomberg) — Israel’s benchmark TA-35 stock index dropped and Israeli dollar bonds declined to their lowest levels since last year as traders reduced risk amid heightened fears of an attack by Iran.
The TA-35 index was down 2.4% as of 3 p.m. in Tel Aviv, the biggest loss worldwide and the second day this week it’s dropped more than 2%. Israeli dollar bonds due in July 2030 fell about 0.8 cents to 85.592 cents on the dollar, their lowest level since Nov. 2023, in the biggest drop among emerging-market sovereign dollar bonds on the day.
The selloff comes as navigational signals were scrambled over Tel Aviv in a preemptive measure aimed at disrupting GPS-directed drones or missiles that might be fired by Iran or its proxies. Iran has vowed to retaliate against Israel for a deadly strike at a diplomatic compound in Syria on Monday that killed at least 13 people including Iranian military personnel.
“Local fear of an Iranian retaliation,” along with lower appetite for risk ahead of the Israeli weekend that starts Friday, are driving the selling, said Joel Kirsch, head of equity trading for international accounts at Leader & Co. Investment House in Tel Aviv. “Liquidity is light, so any local selling will push market lower.”
Israel and Hamas have been at war since the Gaza militant group invaded Israel on Oct. 7, killing 1,200 people and taking around 250 hostage. Israel launched a ground invasion in Gaza a few weeks later, and more than 32,000 Palestinians in Gaza have been killed since, according to the Hamas-run health ministry.
Hamas is designated a terrorist organization by the US and European Union.
Over the past week, investors have become increasingly worried that the war with Hamas could expand to a fight with Iran, either directly or via its proxy Hezbollah in Lebanon. Meanwhile, frictions between Israel and the US, its most important ally, have deepened over the large and mounting death toll in Gaza.
That’s in turn increased pressure on Israeli Prime Minister Benjamin Netanyahu, who’s now facing protests against his government inside Israel and harsh condemnation abroad. Benny Gantz, a member of Israel’s war cabinet, called for early elections at a press conference on Wednesday.
“Domestic protests, the call for elections by Gantz, and increasingly open criticism from the US administration and other traditional allies over the manner in which the war is being prosecuted are all weighing on Israeli assets,” said Hasnain Malik, head of equity strategy research at Tellimer in Dubai.
Israeli assets have so far proved resilient to the conflict, with the stocks index gaining about 6% since the war broke out in October and the Israeli shekel gaining 3.7% against the dollar over the same time period.
The cost to insure Israeli government debt against default has soared, though, and has remained elevated since the start of the conflict. Five-year credit default swaps traded at 119 basis points on Thursday, up from 59 basis points in the first week of October.
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