Israeli Markets Plummet as Election Results Create Uncertainty

Israeli financial markets experienced a sharp downturn on Wednesday, reversing earlier optimism following the general election. The Israeli shekel, which had strengthened in the days prior, significantly depreciated, while the Tel Aviv Stock Exchange (TASE) saw substantial losses as trading resumed after a holiday. The dollar surged to approximately 3.10 shekels, a notable increase from its level around 3.02 shekels the previous day.

The TASE's leading indices, TA-35 and TA-125, dropped by 2.85% and 3.3% respectively. The construction sector led the decline, plummeting by about 8%, with real estate and insurance indices also falling over 6%. The TA-90 index weakened by 4.6%, and bank stocks decreased by approximately 4%.

Bond markets also reacted, with the yield on ten-year Israeli government bonds rising by about 0.06 percentage points to around 4.1%, indicating a decrease in bond prices and higher investor yield demands. This market reaction contrasts with the pre-election sentiment, where anticipation of a potential change in government, possibly improving international relations and reducing Israel's risk premium, had fueled market gains.

The uncertainty stems from the election results, which, based on preliminary counts, do not indicate a clear majority for either bloc. Projections suggest Netanyahu's bloc may secure 55-57 seats, while the opposing bloc could gain 47-50 seats, with Arab parties holding the remaining seats. This indecisive outcome has heightened market volatility, a phenomenon observed in previous elections, with studies showing increased volatility in the weeks following votes.

Forex markets, operating nearly around the clock, were the first to react to the shifting expectations. Analysts at JPMorgan had previously estimated that election outcomes could cause up to a 3% fluctuation in the shekel due to potential impacts on international relations and Israel's risk perception. The current movement is approaching that scale. Investors are now focused on practical concerns such as the formation of a stable government, the future of the finance ministry, the passage of the 2027 budget, and the implications for the deficit and defense spending.