Israeli financial markets fell sharply on Wednesday, as preliminary election results pointed to a political stalemate and erased two days of gains built on hopes for a change of government.
Investors returned to trading after the election-day holiday to a very different picture from the one they had priced in. The dollar, which had dropped to about NIS 3.02 on Tuesday, climbed to roughly NIS 3.10 on Wednesday morning. Stocks on the Tel Aviv Stock Exchange also declined.
The benchmark TA-35 index lost 2.85%, and the TA-125 fell 3.3%. Construction shares led the retreat with a drop of about 8%. Real estate and insurance indices each lost more than 6%, the TA-90 slipped 4.6%, and bank stocks shed around 4%. In the bond market, the yield on Israel's 10-year government bond rose by about 0.06 percentage points to near 4.1%, a sign of falling bond prices and higher returns demanded by buyers.
The reversal followed a strong start to the week. On Monday, the last trading session before the vote, the TA-35 rose about 1.99% and the TA-125 gained 1.81%. On Tuesday, with the stock exchange closed, the shekel kept strengthening and reached its highest level in about five weeks. The rally rested on an assessment that high turnout could favor the bloc opposed to Prime Minister Benjamin Netanyahu and lead to a new government.
Investors were not necessarily backing a political side. Some believed a different government could ease diplomatic tensions, improve ties with Western countries and reduce the risk premium attached to Israel.
That scenario grew less certain as results came in. Exit polls released when voting stations closed showed a narrow lead for the anti-Netanyahu bloc, though short of the 61 seats needed for a Knesset majority. Overnight, partial counts shifted the picture. Estimates put Netanyahu's bloc at roughly 55 to 57 seats and the opposing bloc at around 47 to 50, with the remaining seats going to Arab parties. Neither side has a clear majority, and the results are not final.
The currency market, which trades almost around the clock, was the first to respond. In late August, JPMorgan economists estimated that the election outcome could move the shekel by as much as 3%, partly because of its possible effect on Israel's international relations and perceived risk. The move since Tuesday is already close to that size. Foreign exchange trading was relatively thin on election day, however, and changes in volumes and hedging by institutional investors could magnify swings.
Volatility may persist. Research by the Tel Aviv Stock Exchange covering 10 earlier election cycles found that volatility rose by as much as 45% in the weeks after the vote, compared with a typical trading week.
Attention is now expected to turn to practical questions: whether a stable government can be formed, who will lead the Finance Ministry, whether a 2027 budget can pass, and what will happen to the deficit and defense spending. As the article's analysis put it, markets do not wait for official results before pricing in the future, and on Wednesday the path to a decisive outcome looked considerably longer than investors had hoped.
