Shekel weakens on election deadlock

The Israeli shekel lost value on Wednesday morning after preliminary election results indicated a political stalemate, wiping out gains from the previous two days. The currency rose from approximately 3.02 dollars per shekel on Tuesday to roughly 3.10 by Wednesday morning. This shift reflected investor reaction to a lack of a clear winner in the recent vote.

Stocks in Tel Aviv followed the currency downward. The TA-35 index dropped 2.85%, while the broader TA-125 index fell 3.3%. Sector-specific declines were steeper for some industries. Construction shares lost about 8% of their value. Real estate and insurance indices each shed more than 6%. Bank stocks declined by around 4%, and the TA-90 index slipped 4.6%.

The bond market also adjusted to the new political reality. The yield on the 10-year Israeli government bond increased by about 0.06 percentage points to near 4.1%. Higher yields indicate that bond prices are falling and that buyers are demanding greater returns to compensate for perceived risk.

This reversal followed a strong start to the week. On Monday, the final trading day before the vote, the TA-35 rose 1.99% and the TA-125 gained 1.81%. On Tuesday, while the stock exchange was closed, the shekel strengthened to its highest level in about five weeks. Investors had priced in a potential change of government, hoping that high turnout would favor the bloc opposed to Prime Minister Benjamin Netanyahu. Some analysts believed a new administration could ease diplomatic tensions and reduce the risk premium attached to Israeli assets.

Preliminary counts shifted the outlook. Exit polls at the close of voting showed a narrow lead for the anti-Netanyahu bloc, but the margin was short of the 61 seats required for a Knesset majority. Overnight partial counts estimated that Netanyahu's bloc holds roughly 55 to 57 seats. The opposing bloc is projected to have between 47 and 50 seats. The remaining seats are allocated to Arab parties. Neither side currently commands a clear majority, and official results are not yet final.

JPMorgan economists estimated in late August that the election outcome could move the shekel by up to 3%. The currency movement since Tuesday is already close to that range. Foreign exchange trading was thin on election day, but volume changes and hedging by institutional investors may amplify future swings. Research from the Tel Aviv Stock Exchange notes that volatility in the weeks following a vote can rise by as much as 45% compared to a typical trading week.

Market attention now turns to the formation of a stable government. Key questions include who will lead the Finance Ministry, whether a 2027 budget can pass, and how the deficit and defense spending will be managed. The path to a decisive political outcome appears longer than investors had anticipated.