Israeli Markets Face New Risks After US Midterms, Expert Warns

The Israeli stock market, the shekel, and bond market face ongoing risks following the recent elections in Israel and the US, according to Drur Karni, CEO and Founder of Karni Family Office. Karni stated that the "risk for the Tel Aviv Stock Exchange is not over with the elections: it is moving to the budget, the shekel, and the bond market." While global investors are focused on sector rotations and re-pricing tech stocks, the key question for Israel is whether a government will be formed that can pass a budget and establish credible fiscal policy. Uncertainty regarding the government's composition and decision-making ability persists, and failure to approve a budget on time could lead to a continuing budget regime, limiting fiscal flexibility. Karni noted that while the local market has historically closed gaps with global markets after political clarity, Israel now faces a deficit and ongoing security burdens, which could maintain these gaps without fiscal discipline.

A "confrontational Congress" in the US could increase scrutiny on security aid, armament, and regional policy, potentially pressuring diplomatic settlements. Karni clarified this does not mean US aid will cease, but uncertainty over its terms and security operational freedom may factor into investor risk calculations. He also suggested that progress on ceasefires could impact demand expectations in the defense sector.

Karni identified the shekel and government bonds as key risk barometers for the Israeli economy. Defense spending and state borrowing needs could continue to pressure long-term yields. If investors demand higher compensation for budgetary and security risks, financing costs will rise, particularly for leveraged sectors like real estate and construction. Political and security uncertainty could also weaken the shekel, making imports more expensive and potentially limiting the Bank of Israel's ability to lower interest rates, especially if energy prices remain high. Conversely, regional calm and credible fiscal policy could reduce the risk premium. Karni advised monitoring not only stock indices but also long-term bond yields, the shekel's exchange rate, and the ability to pass a budget.

Following the US midterm elections on Tuesday, trading on the Tel Aviv Stock Exchange occurred amidst volatility on Wall Street and political uncertainty in Israel. Global tech stocks were under pressure due to concerns about high valuations of AI companies and infrastructure investments. The shekel experienced fluctuations against the dollar, influenced by political and economic developments. On Wednesday, the TA-35 index dropped about 2%, followed by a further 3.7% decline on Thursday. A sharp correction occurred on Friday, with the TA-35 index jumping over 3% and the TA-125 strengthening by 2.8%. The shekel weakened significantly, with the dollar rising from 3.118 shekels at the end of October to 3.194 shekels by Friday, a depreciation of about 2.4% over the week. This volatility reflects a combination of Israeli political uncertainty, potential implications of US election results, and turmoil in Wall Street's tech stocks.