Shekel falls as Israeli vote stalls

Israeli financial markets reversed two days of gains on Wednesday. Preliminary election results suggested a political stalemate. Investors priced in a change of government over the weekend. The new data erased those expectations.

The shekel weakened sharply. The dollar climbed to roughly 3.10 new Israeli shekels on Wednesday morning. It had dropped to about 3.02 on Tuesday. The currency reached its highest level in five weeks before the reversal.

Stocks on the Tel Aviv Stock Exchange declined across the board. The benchmark TA-35 index lost 2.85%. The TA-125 fell 3.3%. Construction shares led the drop, falling about 8%. Real estate and insurance indices each lost more than 6%.

Bank stocks shed around 4%. The TA-90 slipped 4.6%. In the bond market, the yield on Israel's 10-year government bond rose by about 0.06 percentage points. It reached near 4.1%. Higher yields indicate lower bond prices and higher returns demanded by buyers.

The rally on Monday and Tuesday rested on high turnout assumptions. Investors believed the anti-Netanyahu bloc could secure a majority. Exit polls showed a narrow lead for that bloc. However, they fell short of the 61 seats needed for control. Overnight partial counts shifted the picture. Estimates put Netanyahu's bloc at 55 to 57 seats. The opposing bloc held around 47 to 50 seats. Remaining seats went to Arab parties.

JPMorgan economists estimated in late August that the election could move the shekel by 3%. The move since Tuesday is close to that figure. Foreign exchange trading was thin on election day. Institutional hedging could magnify future swings. Research by the Tel Aviv Stock Exchange showed volatility rose by as much as 45% in the weeks after previous votes. Attention now turns to government formation and the 2027 budget.