TASE plunges amid market turmoil

The Tel Aviv 25 index fell 4.01% to 964.36 points, the first time in a year that the index dropped below the 1,000 mark.

stock market 88 224 (photo credit: Bloomberg)
stock market 88 224
(photo credit: Bloomberg)
The Tel Aviv-25 index dropped four percent on Monday as the negative sentiment across global markets and the subprime mortgage crisis continued to deepen, sparking fears of a US recession. "There is a negative sentiment and a certain panic across global markets, heightened by the deepening financial crisis and last week's near-collapse of investment bank Bear Stearns, which in turn is also spooking the local market," said Rafi Gozlan, economist at Prisma Investment House, in an interview with The Jerusalem Post. "Equity markets and the dollar sold off sharply, sparking fears of further financial sector collapses." The Tel Aviv 25 index fell 4.01% to 964.36 points, the first time in a year that the index dropped below the 1,000 mark. The Tel Aviv 100 fell 4.06% to 884.78 points, and the Tel-Tech fell 1.53% to 220.64 points. Trading at the Tel Aviv Stock Exchange ended at 2:15 pm instead of 5:30 due to a labor dispute. Late on Sunday, the Federal Reserve took additional, extraordinary measures to ensure that financial firms have access to liquid funds. In an emergency action, the Fed cut the so-called discount rate on direct loans to banks by a quarter of a percentage point to 3.25%. "The Fed is doing everything to rescue the financial markets from falling into a full-blown meltdown," said Gozlan, "but it seems unlikely the measures taken so far will calm the markets down, since they can not provide a solution for the financial crisis. Even an aggressive interest rate cut like the 1% expected at Tuesday's Fed decision will not be enough. A more aggressive fiscal intervention, whereby the government buys up part of the problematic debt, is needed to offer a real solution." The repercussions of the turmoil in global financial markets and growing concerns over a liquidity crunch were also felt in another sharp decline in the value of the dollar against the basket of currencies around the world and against the shekel. On Monday, the dollar sank to a record low against the euro and the Swiss franc and fell to the weakest in 12 years against the yen, while helping to push gold and crude oil to highs. Analysts at Psagot Ofek Investment House expect the weakness of the dollar in global markets to continue and even worsen following last week's collapse of Bear Stearns. In the local market, the dollar fell 1.4% to 3.42 against the shekel, despite last week's intervention by the Bank of Israel to "anchor" the shekel. Last week, the Bank of Israel intervened in the foreign exchange market for the first time since 1997, buying an undisclosed amount of foreign currency on Thursday and Friday as the shekel-dollar exchange rate fell to an 11-year low of NIS 3.35 in early trading on Thursday. Following the central bank's interventionist move on Thursday afternoon, the dollar strengthened slightly, trading at NIS 3.43. Defending the move at a special conference on Sunday, Governor of the Bank of Israel Prof. Stanley Fischer said it was a "successful" move but hoped future interventions would be rare. "On Monday there was no need for the central bank to intervene, but it might have to intervene once more over the next period," said Gozlan. "The bank's foreign currency market intervention will influence its interest rate decision. If the intervention is successful in achieving its goal of lowering exchange rates, it will reduce pressure on the central bank to cut the interest rate." Prisma predicts that the central bank will cut interest rates by 25-basis points by the end of the month to 3.5% and, in view of expected further interest rate cuts by the Fed, the Bank of Israel will subsequently make another interest rate cut of 0.25% to 3.25%. While analysts at Psagot Ofek Investment House forecasted that the Bank of Israel's intervention in the foreign currency market was only the start. "It cannot be ruled out that the Bank of Israel was just the first central bank to intervene in the foreign currency market to support the dollar," said Ran Ben-Hamu and Yaniv Hevron at Psagot Ofek Investment House. Analysts at Psagot Ofek Investment House expect a sharp interest rate cut by the US Fed on Tuesday to be countered by a corresponding interest rate cut of 75 to 100-basis points by the Bank of Israel. Bloomberg contributed to this report.