Israeli stocks are on track for a five-day losing streak as the intensification of the war on Gaza triggers renewed investor anxiety. The Tel Aviv Stock Exchange 35 Index (TA-35) dropped as much as 2.3% on Tuesday, at one point recording the steepest losses globally, before recovering slightly to close down 0.2%.

The decline occurred despite a continued rally in global markets driven by expectations of further easing by the US Federal Reserve. The selloff affected nearly every sector, with 31 of the TA-35 index's 35 constituents falling.

Major players, such as Teva Pharmaceutical Industries Ltd. and Mizrahi Tefahot Bank Ltd., were responsible for roughly 37% of the index’s movement.

Despite this downturn, the Israeli stock market had shown strong performance earlier in the year, with the TA-35 rising 26% through September 9. However, that momentum has sharply reversed as the war on Gaza drags on with no clear resolution in sight.

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Business leaders warn of economic downturn

The prolonged war on Gaza, particularly the renewed military operations targeting Gaza City, has triggered concern from business leaders and market analysts. Images of destruction and mounting international criticism, even from allies of "Israel", have added pressure on the market.

Israeli Prime Minister Benjamin Netanyahu acknowledged "Israel's" growing isolation and pledged to pursue economic self-sufficiency in the face of potential sanctions.

“The costs of endless wars on all fronts in terms of lost growth, emigration of human capital, worse international relations, greater domestic political polarisation, and arguably, no better security all weigh on Israeli asset prices,” Hasnain Malik, a strategist at Tellimer in Dubai, told Bloomberg. “PM Netanyahu’s latest speech that urges preparedness for more economic autarky reinforces those concerns.”

Israel Business Forum: Netanyahu leading 'Israel' to ‘dangerous, unprecedented’ downturn

The Israel Business Forum, which represents most private sector workers from 200 of the entity's largest companies, warned that Netanyahu's policies are leading "Israel" into a “dangerous and unprecedented economic and political downturn.”

This comes after Netanyahu said yesterday that "Israel" was facing the threat of diplomatic isolation over the war on Gaza, adding that it needed to become a “Super Sparta” and be self-reliant.

“We are not Sparta — this vision as presented will make it difficult for us to survive in an evolving global world,” the forum warned. “We are marching toward a political, economic, and social abyss that will endanger our existence in Israel.”

“The Israeli economy shows exceptional resilience, despite the security and political challenges — but not forever,” the forum added.

The forum demanded that Netanyahu “stop this” policy and called on the government to immediately change course.

“The government must urgently put an end to the longest war in Israel’s history, promote the release of all hostages, announce a state investigation committee [regarding the Hamas-led October 7, 2023, attack], and set a date for elections in the immediate future,” the forum demanded.

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Technical indicators signal market vulnerability

Technical analysis shows that the earlier rally may have overextended market valuations. The relative strength index for the TA-35 recently approached levels associated with overbought conditions.

Additionally, the moving average convergence-divergence indicator displayed a bearish crossover, hinting at further weakness ahead.

While stocks fell, other assets were mixed. The shekel posted modest gains, and "Israel’s" sovereign dollar bonds remained largely unchanged. Still, growing fears over the trajectory of the Israeli economy continue to influence investor sentiment.

With the war on Gaza escalating and no immediate diplomatic or political resolution in sight, both domestic and international investors are expected to remain cautious.