(Bloomberg) — Markets rallied around the Middle East this week with progress on a Gaza ceasefire deal sending Israeli and Egyptian stocks to record highs and boosting a rebound in Saudi Arabia.
But as negotiators work to ensure the agreement between Israel and Hamas holds, some traders are sounding a note of caution about the risks facing investors in the months ahead.
There’s concern that optimism over the ceasefire is already reflected in prices for stocks and bonds, and questions remain about how the next stages of the deal will be implemented. In Israel, issues like judicial reform and policies for Gaza will set the tone for markets, according to Nick Rees of Monex Europe Ltd.
The shekel is up 1% against the dollar this week, one of the best performances globally, and the Tel Aviv Stock Exchange 35 Index has added 2.4%.
“We would be cautious around turning too aggressive on the shekel upside in the short run,” said Rees, head of macro research at Monex in London. “The domestic political situation is a dynamic that we think is a little overlooked.”
Israel’s markets have rallied strongly for months on the prospect of peace, pushing the Tel Aviv index to a more than 30% gain this year, the 12th best performance among global benchmarks. Credit default swaps that price the risk of lending to Israel have fallen to the smallest premium in four years.
MSCI Inc.’s benchmark for Mideast equities has gained for four consecutive weeks, and is now trading at the highest valuation since early July. The Saudi exchange’s main index extended its rebound from a two-year low hit last month to 11% even as crude oil posted a weekly loss.
While markets are flashing relief over the deal, there’s no guarantee that peace will last. A ceasefire is now in place in most of Gaza and Israeli media says the country’s troops have begun to pull back from their positions.
Most of the region’s stock markets, including those in Israel, Egypt and Saudi Arabia, were closed Friday. When they reopen on Sunday, investors will be looking for signs that the deal is holding.
Negotiators still have plenty of challenges to overcome. Hamas — designated a terrorist organization by the US, European Union and others — has yet to agree to lay down its arms. There’s little clarity on who will run Gaza next.
There are also questions about Benjamin Netanyahu’s fragile coalition government, said Hasnain Malik, head of EM equity and geopolitics strategy at Tellimer.
“The question is how long the ruling coalition holds and what happens if, and perhaps when, the ceasefire breaks down as it did in March,” said Malik in an interview from Dubai.
If the US-led peace plan holds, investors will likely start to turn their attention to more economic issues, said Daniel Hass, head of shekel fixed-income strategy at Bank Hapoalim in Tel Aviv.
“For the next few days, the markets’ focus will be on geopolitics,” he said. “Then people will start looking at fundamentals.”
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