Israel's shekel jumped sharply and stocks and bonds gained on Monday as investors began to look beyond the escalating conflict with Iran and shape a more favourable long-term risk assessment for the country's assets.
The shekel traded at 3.50 to the dollar by 1642 GMT, 3.6% stronger on the day and scoring its best performance since October 9, 2023, when the central bank heavily intervened to shore up the currency following the outbreak of the Gaza war.
The Israeli currency had rallied as much as 4.6% earlier in the session, snapping a four-day losing streak and clawing back hefty losses suffered last week when rumours of an Israeli attack on Iran intensified. Israel launched its biggest-ever military strike against its longstanding enemy early on Friday.
The main Israeli share indices also gained, with the broad Tel Aviv 125 index (.TA125) closing 2.6% higher and extending Sunday's gains of some 0.5%. The rise followed a weekend of punishing Israeli attacks on Iranian nuclear facilities, ballistic missile factories and military commanders, which were met with retaliatory Iranian strikes against Israel.
"The reaction of the local markets ... perhaps reflects the assessment that in certain scenarios this war may be a catalyst for a new status quo in the region," said Bank Hapoalim chief economist Victor Bahar.
Israeli officials have said the conflict will take time and will not end until the Iranian nuclear threat is removed. Tehran denies it wants to build nuclear weapons.
Middle East tensions have been rising since the war in Gaza erupted 20 months ago after Hamas-led and Iranian-backed militants stormed into southern Israel and took 251 hostages and killed 1,200 people, most of them civilians.
Israel's military campaign since has killed nearly 55,000 Palestinians, most of them civilians, according to health authorities in Gaza.
Fighting between Israel and Tehran's proxies such as Hezbollah in Lebanon and the Houthis in Yemen has also intensified.
"Most of these (proxies) have been destroyed or weakened, but Iran’s nuclear weapon program has remained a long-term existential threat for Israel," said Leader Capital Markets chief economist Jonathan Katz.
"Delaying this program significantly - and maybe a credible commitment from Iran to forgo high-level nuclear enrichment - will reduce Israel’s geopolitical risk premium markedly."
Israel's international bonds as well as its credit default swaps - a proxy for insurance against risk of default - both regained ground on Monday.
The 2120 maturity added more than 1.5 cents to bid at 67.07 cents on the dollar, Tradeweb data showed, around 1 cent below levels seen last Wednesday when reports of a potential imminent attack emerged. Israel's five-year credit default swap also dropped sharply to 108 basis points from Friday's close of 122 bps.
At a domestic bond auction on Monday, Israel sold 2.75 billion shekel ($785 million) of various debt maturities in a sale that was multiple times oversubscribed.
Israel's economic performance and the macroeconomic pressures it faces have been choppy in recent years.
Data on Sunday showed the inflation rate eased more than expected to 3.1%, though the central bank is expected to remain cautious. The derivatives market is pricing in an interest rate cut in mid-2026.
Earlier on Monday, first-quarter economic growth was revised up to an annualised 3.7% from 3.4%.
($1 = 3.5017 shekels)
