Israeli Currency Slides as Vote Leaves No Clear Winner

Israeli financial markets reversed course on Wednesday as preliminary election data indicated a political stalemate. The shift erased two days of gains that had accumulated on hopes for a change in leadership. Investors returned from the election-day holiday to find the market outlook had changed drastically from their earlier pricing.

The shekel climbed to approximately 3.10 per dollar by Wednesday morning. This level marked a sharp increase from Tuesday, when the currency had strengthened to about 3.02. The move reflects a rapid revaluation of risk following the vote.

Equity markets followed the currency downward. The benchmark TA-35 index dropped 2.85%, while the broader TA-125 index fell 3.3%. Construction stocks suffered the steepest losses, declining by roughly 8%. Real estate and insurance sectors each shed more than 6%, bank stocks lost about 4%, and the TA-90 index slipped 4.6%. In the bond market, the yield on the 10-year government bond rose by 0.06 percentage points to near 4.1%.

This decline contrasts with the week's earlier momentum. On Monday, the last trading day before the election, the TA-35 rose 1.99% and the TA-125 gained 1.81%. Tuesday saw the shekel reach its highest level in five weeks. Analysts had expected high voter turnout to favor the bloc opposing Prime Minister Benjamin Netanyahu, potentially leading to a new government that could ease diplomatic tensions and reduce Israel's risk premium.

Partial counts shifted that expectation. Estimates place Netanyahu’s bloc at 55 to 57 seats and the opposing bloc at 47 to 50 seats. The remaining seats are projected to go to Arab parties. Neither side holds a clear majority, and the results are not yet final. JPMorgan economists had estimated in August that the election outcome could move the shekel by up to 3% based on its impact on international relations and perceived risk.

Market volatility often rises after elections. Research by the Tel Aviv Stock Exchange covering ten previous cycles found that volatility increased by as much as 45% in the weeks following a vote compared to a typical trading week. Attention now turns to practical governance questions, including who will lead the Finance Ministry and whether a 2027 budget can pass. The path to a decisive outcome appears longer than investors initially hoped.