Shekel Moving Towards 3-year Low and Government Bonds Decline

On Tuesday, there was a drop of more than 2% in the shekel and shares and government bonds in Tel Aviv also declined, after the a controversial judicial overhaul bill passed its first reading in the Knesset.

In afternoon trading in Tel Aviv, the local currency recorded declines of more than 2% and was trading against the US dollar at a value of 3.64, which is the weakest it has been since April 2020.

The decline

Since the start of the month, the shekel has recorded losses of more than 5% against the greenback. There was also a 1.8% decline in the benchmark TA-125 index of the Tel Aviv Stock Exchange.

A 1.5% drop was also recorded in the blue-chip companies TA-35 index and there was a decline between 1% and 3% in the prices of long-term government bonds.

On Monday, US bond and stock markets were closed due to Presidents Day. The Nasdaq Composite had recorded declines on Friday of about 0.6%.

Early on Tuesday, one of the bills that is part of the overhaul of Israel’s judiciary system passed its first reading in the Knesset.

It would grant control to the government over judicial appointments and take away the ability of the High Court to revoke Basic Laws.

The protests

The changes that have been proposed by Benjamin Netanyahu’s government have sparked huge protests in the country in recent weeks.

These protests have demanded that the democracy in Israel be protected and to ensure that the system of checks and balances remains.

Market sentiment has also taken a hit due to the plans of the ruling coalition to take away the powers of the judiciary.

This is in light of the negative impact on the credit rating of the country, which could result in capital outflow and scare investors away.

The warnings

It should be noted that both foreign and local institutional investors, along with notable economists and banking heads, have warned about the potential financial and economic fallout of the reforms.

Some have also called for the opposing parties to negotiate and compromise, as suggested by President Isaac Herzog.

Economists said that the markets had priced in the possibility of a compromise until now, but after the Knesset reading, this is no longer the case.

They said that if the controversial legislation is passed, it would be a big concern because the economy would become very different, as the government will become too strong.

Therefore, the markets had just repriced higher risks where domestic assets are concerned and local government bonds are experiencing a selloff, while demand for foreign exchange has risen.

This would put the government under pressure. Some local startups and companies have already begun to withdraw their funds on behalf of overseas investors.

They are hedging their assets and diversifying their risks before the final readings of the controversial bills.

The judicial transformation will bring prominent economic changes in Israel and investors have become apprehensive about their long-term impact, resulting in a decline in markets.