US Midterms Pose Dual Risk to Israel's Economy Amid Iran Tensions

As the US midterm elections take place today, November 3, and with the possibility of renewed escalation with Iran following the vote, Dr. Ilan Gildin, Partner and Head of Hedge Fund at Carney Family Office, analyzes the dual risks to global markets. He points to potential political gridlock in Washington alongside possible shocks to energy prices. Gildin suggests that the Israeli economy could be impacted through its bond market and financing costs, not just stock market volatility.

"The US elections will not necessarily end the uncertainty. The real risk could begin in the two weeks after them," Gildin stated. He estimates that a divided government might calm Wall Street but will not resolve the debt crisis. Gildin highlighted that capital and commodity markets are approaching two significant uncertainty points: the midterm election results and the potential for renewed military escalation with Iran afterward. The primary scenario markets are examining is a divided government, where Republicans might lose their majority in one or both houses of Congress.

Historically, Wall Street viewed such splits as a brake on far-reaching legislative initiatives, corporate tax hikes, and fiscal expansion. However, Gildin noted the current fragile starting point, with the federal deficit projected at around $2 trillion for fiscal year 2026, national debt exceeding $40 trillion, and long-term yields continuing to burden financing costs. With the Federal Reserve maintaining interest rates between 3.75% and 4%, prolonged congressional gridlock may not necessarily benefit the bond market.

Gildin further explained that the week or two following the elections represent a particularly sensitive window for the risk of broader military escalation with Iran. Before the vote, the administration has a clear incentive to avoid shocks that would spike U.S. consumer fuel prices. However, post-election, this immediate political pressure lessens, though a decision for military action is not certain. With already strained supply chains, Brent crude trading above $100 a barrel, and high diesel refining margins in Europe, any further disruption to shipping lanes in the Strait of Hormuz or energy infrastructure in the Gulf could send energy prices soaring again, renewing inflationary pressures and limiting central banks' ability to lower interest rates.

Israel, Gildin explained, is exposed through its debt market, real estate, and banks. While the U.S. is in a relatively strong position as an energy exporter, Europe and emerging markets dependent on energy imports are vulnerable to stagflationary pressures. In Israel, further regional escalation could extend the budget burden and combat expenses, increase the Treasury's borrowing needs, and add upward pressure on long-term government bond yields. This would primarily affect leveraged domestic sectors like real estate and banking, while Israeli international technology and defense export companies with dollar revenues might show relative resilience. Ultimately, Gildin believes the US midterm elections may not dissipate uncertainty but could mark the beginning of a more complex chapter of geopolitical decisions in the Middle East.