Shekel Weakens to 3.10 as Israeli Vote Leaves No Majority

Investors wiped out two days of financial gains on Wednesday after preliminary election results indicated a political stalemate in Israel. The market reversal followed a strong rally earlier in the week, which had been driven by hopes that high voter turnout would unseat Prime Minister Benjamin Netanyahu and form a new government.

The currency market reacted first to the news. The shekel, which had strengthened to approximately NIS 3.02 against the dollar on Tuesday, fell to roughly NIS 3.10 by Wednesday morning. JPMorgan economists estimated in late August that the election outcome could move the shekel by up to 3 percent based on shifts in international risk perceptions. The drop seen on Wednesday approached that projected range, although trading volumes remained thin on election day.

Equities on the Tel Aviv Stock Exchange declined across the board. The benchmark TA-35 index dropped 2.85 percent, while the TA-125 fell 3.3 percent. Sector-specific losses were steep, with construction shares losing about 8 percent. Real estate and insurance indices each shed more than 6 percent, and bank stocks declined by around 4 percent. Bond yields also rose, with the 10-year government bond yield increasing by about 0.06 percentage points to near 4.1 percent.

The shift in investor sentiment stemmed from partial counts released overnight. Exit polls at the close of voting suggested a narrow lead for the anti-Netanyahu bloc, but that lead fell short of the 61 seats required for a Knesset majority. Later estimates placed Netanyahu’s bloc at roughly 55 to 57 seats and the opposition at 47 to 50, with remaining seats allocated to Arab parties. Neither side secured a clear majority, and the final results are not yet in.

Traders had previously priced in the possibility that a change in government might ease diplomatic tensions and reduce the risk premium associated with Israeli assets. That expectation weakened as the data showed a fragmented legislature. The TA-35 had risen nearly 2 percent on Monday, the last trading day before the holiday, and the shekel had hit a five-week high on Tuesday.

Market volatility is likely to remain elevated in the coming weeks. Research from the Tel Aviv Stock Exchange covering ten previous election cycles found that volatility increased by as much as 45 percent in the post-election period compared to a typical trading week.

Attention now turns to the mechanics of government formation, including the leadership of the Finance Ministry and the passage of a 2027 budget. Deficit management and defense spending remain key variables as markets process the lack of a decisive winner.