July 2026 Market Insights: Equities Recover, Bonds Soften

Market Updates

Israeli equity markets recovered part of June's losses in July, while fixed income softened as long-term yields rose. The Bank of Israel cut its policy rate early in the month. For the rest of the month, trading was shaped by renewed escalation between the United States and Iran, higher energy prices, and concern over disruption to global energy supply. Together these led the market to price out further easing in the near term.

Market Performance in July

Equities gained modestly, while bonds were mixed.

• Israeli Equities:

  • TA-35: +2.0% (YTD +14.3%)

  • TA-90: +0.4% (YTD +0.7%)

  • TA-125: +1.5% (YTD +11.1%)

• Israeli Bonds:

  • Tel-Bond 60: +0.2% (YTD +3.0%)

  • Tel-Bond Shekel: -0.3% (YTD +2.5%)

  • Tel Gov Shekel: -0.7% (+2.8%)

All three flagship indices now hold a positive return for the year, and the TA-90 has returned to positive territory after giving back its 2026 gains in June. The gains were narrow. Banking, oil and gas, and financial stocks led, while construction, biomed and technology declined. Because the advance was concentrated in a small number of large names, the TA-35 outperformed the broader TA-90.

Fixed income was softer, led by the government segment. The yield on Israel's 10-year government bond rose 16 basis points to 3.85% by month-end, from 3.69% at the end of June, even as the Bank of Israel cut rates. Higher oil prices lifted inflation expectations, and the market moved to price out further easing. The weakness extended into shekel-denominated corporate credit, while the Tel-Bond 60 recorded a slight gain. Israel's risk premium widened from very low levels. Five-year CDS moved from 55 to 64 basis points and ten-year CDS from 89 to 101, though both remain near where they stood before October 2023.

The shekel weakened approximately 2.6% against the U.S. dollar to 3.057, extending June's decline, though it remains 4.1% stronger than at the start of the year. Three things drove the move. The rate cut narrowed the interest rate differential with the United States. The local risk premium rose alongside security-related developments. Broad dollar strength, on expectations of tighter U.S. policy, reinforced both.

Macro Picture

On July 6, the Bank of Israel cut rates by 25 basis points to 3.5%, in line with expectations and its third cut of the year. The Research Department projects the rate declining to approximately 3% over the next twelve months, which implies two further quarter-point cuts. The Committee's message was more balanced than in past decisions. For the first time, it set out the factors working to lower inflation: shekel strength, lower energy prices, and a moderating risk premium. It continued to cite fiscal risk as a reason for caution. Rising energy and shipping costs and expected fuel price increases make a cut at the next decision unlikely.

June's Consumer Price Index was unchanged on the month, against an expected 0.1% decline. Annual inflation stood at 1.6%, moving toward the midpoint of the Bank of Israel's target range. The deficit forecast was revised down to 4.9% of GDP for 2026 and 4.2% for 2027. Moody's affirmed Israel's Baa1 rating with a stable outlook. It also lowered its 2026 growth forecast to 3.7% and moved most of the expected recovery into 2027.

Market volatility held new bond issuance down during the month, a change from the strong pace of the first half of the year. Lower issuance reduces one of the main channels through which active local managers generate value. Over the medium term, the fiscal picture remains an open question. Higher defense spending and the absence of one-off revenues may gradually lift the debt-to-GDP ratio.

Taken together, July's modest equity gains came alongside weaker bonds and a softer shekel. Geopolitical developments and energy prices drove that combination, not domestic inflation, which continued to improve. The rate cut and the Research Department's forecast point to further easing over the coming year, though the timing now depends on energy prices and the fiscal outlook.

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