Stocks, shekel sink on expectation of US strike on Syria

War rhetoric sends shekel to weakest point since early July and leads to 2.4% drop in the TASE top 25 index.

Money cash Shekels currency 521 (photo credit: Reuters)
Money cash Shekels currency 521
(photo credit: Reuters)
American rhetoric portending a military strike in Syria made waves in Israeli markets on Tuesday, sending the shekel to its weakest point since early July and leading to a 2.4 percent drop in the Tel Aviv Stock Exchange’s TA-25 Index.
On Monday, US Secretary of State John Kerry said it was “undeniable” that the Syrian regime used chemical weapons in its civil war. “President Obama believes there must be accountability for those who would use the world’s most heinous weapons against the world’s most vulnerable people,” he said.
CBS reported that the Obama administration was preparing an “airtight circumstantial case” against Syrian President Bashar Assad to justify a strike.
The shekel, which has been on a strong streak, hovering below 3.6 to the dollar since early July, shot up to 3.603 on Monday and 3.654 on Tuesday, its weakest showing in more than six weeks. Just two weeks ago, it had sunk to 3.528 against the dollar.
“US Secretary of State John Kerry’s aggressive speech was taken by most analysts as a declaration before an attack,” foreign- exchange trading firm FXCM wrote in an analysis.
“This raises concern in the markets because a regional escalation, which may also drag Israel into the fray, is what is harming the shekel.”
Though the palpable market reaction portends the possibility of unpleasant things to come, many will take solace in a weaker shekel, which will boost exports. Interested groups hoping that the Bank of Israel would lower the interest rate on Monday lashed out when kept it remained unchanged at 1.25%.
“During the past year the shekel appreciated against the dollar by 11%,” Israel Manufacturers Association economic committee chairwoman Nava Ravid said. “This trend is causing severe harm to the export sector and local manufacturing.”
Shmuel Ben-Ari of Pioneer Financial Planning said continued strength would inevitably lead to an interest-rate drop.
“I believe that in the event the dollar will return to weaken against the shekel, and continue to harm and bite into economic growth, the next governor will be forced to lower the rate,” he said.
If regional conflict spreading from Syria keeps spooking the markets, that may not be necessary.
An S&P Global analyst said for the time being, Israel did not have to worry about the risk to its economy and credit rating: “There are no implications unless there is a serious escalation that draws Israel into conflict.”
Emerging currency losses deepened on Tuesday, pushing Turkey’s lira to a fresh record low against the dollar as fears of Western military action against Syria added to the flight from riskier assets. It came as a number of emerging currencies hit multiyear lows even though US Treasury 10-year yields, which such currencies tend to track, were off two-year highs.
Turkey would be in the front line if military attacks are launched on Syria. Higher oil bills and a refugee influx from the neighboring conflict could exacerbate its annual $50 billion funding gap.
But the lira is also feeling the heat from Turkey’s reluctance to raise interest rates to a level that provides investors with adequate rewards for the risks.
“Markets haven’t bought the monetary tightening they announced last week, as foreign investors think interest rates are not high enough to attract inflows to fund the large current-account deficit,” said William Jackson, an economist at Capital Economics in London.
He predicted that Turkey could be forced to raise its lending rate if lira selling continues.
The currency fell more than 1% to another record low, bringing year-to-date losses to almost 12%, while two-year bond yields touched January 2012 highs of around 10.4% and shares fell 2.5%.
Lira losses spiraled after Erdem Basci, the central bank’s governor, said he was prepared to use net reserves of $40b. to defend the currency but would not use interest rates.
The Syrian situation is an added complication.
“Turkish yields continue to inch higher, and we do not rule out that this could get a bit out of hand if the Syria situation escalates,” Danske Bank analysts told clients, adding it was exiting its lira position.
Political risk was prompting a broader-based flight to safer assets such as the yen and Swiss franc.
“We are not calling for a major rebound any time soon,” said Bhanu Baweja, head of global emerging-markets strategy at UBS in London. “What we need to see is EM exports rebounding and people feeling that real interest rates in emerging markets have adjusted adequately, and we are not there yet.”
The South African rand lost 1%.
In Asia, the Indian rupee slid to another record low, while Indonesia’s rupiah, Malaysia’s ringitt and Thailand’s baht all hit multiyear lows .
The rupee was impervious to news of almost $30b. in infrastructure projects, as approval of a $20b. cheap-food plan raised fears of a spending spree before 2014 elections.
“[Reserve Bank of India] have to let the rupee find its own value,” Baweja said. “That’s the one sensible thing they are doing – they are not standing in front of this trade.”
China’s yuan remained the outlier, posting modest gains again. With a year-to-date rise of almost 2%, it is the only Asian currency to appreciate in 2013.
The hefty currency losses also caused a stampede out of emerging-market equities, which fell 1.2%, though losses were tempered by Shanghai’s 0.2% gain.
Indian shares fell 3%, while Russian shares fell 1.3% despite the rising oil price.

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