Israeli stocks fall, currency weakens as Netanyahu bloc projected to win more seats than expected

Israel’s currency, stocks and bonds came under pressure on Wednesday as election results showed Prime Minister Benjamin Netanyahu’s right-wing bloc performing more strongly than expected, but still falling short of a parliamentary majority.

With some 71 per cent of votes tallied, Israeli media projected Netanyahu’s right-wing bloc to win 54 seats, well ahead of the 47 forecast for rival Gadi Eisenkot’s opposition bloc but short of the 61 needed for a majority in the 120-seat parliament. Arab parties were projected to win 19 seats.

Definitive results were expected on Thursday.

The shekel weakened around 2 per cent to 3.1185 to the U.S. dollar, on track for its worst day in 16 months, and reversing gains made on Tuesday when data on high voter turnout had raised the prospect of a change in government. Tel Aviv’s key benchmark stock index fell around 3 per cent. The stock market had been closed on Tuesday.

Israel’s longer-dated international debt also came under slight pressure, reversing some six days of gains and bucking the wider market trend. The 2054 bond slipped nearly 0.3 cents to bid at 89.09 cents on the dollar, Tradeweb data showed.

Yields on the benchmark domestic 10-year government bond rose nearly 5 basis points to 4.13 per cent.

“Israel’s financial markets have reacted negatively to the result,” said William Jackson, chief emerging markets economist at Capital Economics, adding the initial results offered more paths for Netanyahu to remain in power, though any government that emerged was unlikely to be robust.

“The next government will probably be fragile,” he said.

Failure for either Netanyahu or Eisenkot to form a government would likely lead to another election. In the meantime, Netanyahu would remain head of a caretaker government.

Israel’s markets have risen strongly despite three years of war and political turmoil, supported by the country’s large tech sector, the AI boom and elevated defense spending.

Ahead of Tuesday’s vote, polls showing Eisenkot in the lead had helped extend those gains, with some investors expecting that a change in government could improve relations with Western allies, reduce regional tensions and bring an end to a judicial overhaul that sparked mass protests in 2023.

The election result has so far doused that rally.

Since the Oct. 7 Hamas attacks in 2023, the Tel Aviv blue chip index has risen more than 130 per cent, far outpacing Wall Street’s around 80 per cent gain, while the shekel has climbed around 25 per cent, one of the world’s strongest currency performances over the period.

Analysts said forming a government could prove difficult, adding uncertainty for Israeli financial markets at a time when the AI rally was already stuttering.

“Forming a government will be difficult in Israel,” said Daniel Bergvall, head of economic forecasting at SEB.