Shekel Slides and Stocks Plunge as Israeli Vote Stalls at Deadlock

Israeli financial assets dropped sharply on Wednesday morning, wiping out two days of positive momentum that had built on expectations for a government change. The currency and equity markets moved in tandem as traders processed the preliminary election data.

The shekel climbed from approximately NIS 3.02 on Tuesday to roughly NIS 3.10 on Wednesday. On the Tel Aviv Stock Exchange, the benchmark TA-35 index declined by 2.85%. The broader TA-125 index fell 3.3%. Construction sector stocks suffered the steepest losses, dropping about 8%. Real estate and insurance indices each lost more than 6%. The TA-90 index slipped 4.6%, and bank stocks shed around 4%.

Bond yields also adjusted. The yield on Israel's 10-year government bond rose by about 0.06 percentage points to near 4.1%. This increase indicates that bond prices fell, meaning buyers now demand higher returns. The market reaction marked a sharp reversal from Monday, when the TA-35 rose 1.99% and the TA-125 gained 1.81%. Tuesday, a non-trading day, saw the shekel reach a five-week high.

The initial rally had been driven by high voter turnout, which many believed would favor the bloc opposing Prime Minister Benjamin Netanyahu. Investors hoped a new administration would ease diplomatic tensions and lower the risk premium associated with Israeli assets. Exit polls released when voting stations closed showed a narrow lead for the anti-Netanyahu bloc, but the margin fell short of the 61 seats required for a Knesset majority.

Overnight partial counts complicated the picture. Estimates placed Netanyahu's bloc at roughly 55 to 57 seats. The opposing bloc held approximately 47 to 50 seats. The remaining seats went to Arab parties. Neither side possesses a clear majority, and final results are pending. JPMorgan economists had estimated in August that the election outcome could move the shekel by as much as 3%. The shift from Tuesday to Wednesday already approaches that threshold.

The Tel Aviv Stock Exchange noted that volatility increased by as much as 45% in the weeks following previous elections compared to typical trading weeks. Market attention now shifts to the formation of a stable government and the appointment of a Finance Ministry leader. Traders will watch whether a 2027 budget can pass and how the government manages the deficit and defense spending.

As of Wednesday, the path to a decisive political outcome appeared longer than investors initially priced in. The market is currently absorbing the reality of a fragmented Knesset, with no single party holding the power to form a government independently.