Israeli Bonds and Shekel Slide as Election Leaves No Clear Winner

Israeli financial assets fell on Wednesday after the country's election failed to produce a clear winner. Investors reacted to partial results showing that no major bloc was near the 61 seats needed to govern.

With more than 66% of ballots counted, Prime Minister Benjamin Netanyahu's bloc was on track for 56 seats in the 120-seat Knesset. Challenger Gadi Eisenkot's bloc was projected at 48. Arab-led parties, which belong to neither camp, were projected to take 16 seats.

In markets, the shekel lost 1% against the U.S. dollar, and the Tel Aviv 35 stock index traded 2.7% lower. Government bonds also came under pressure, with yields rising across the curve. The 2-year yield gained 6 basis points, the benchmark 10-year yield rose 4 basis points, and the 30-year yield added 2 basis points. Bond yields and prices move in opposite directions.

Eisenkot, a former military chief of staff, declared victory earlier in the day, citing a preliminary result that had his bloc slightly ahead. He said it should give him the first chance to try to form a government. In a statement on X, he said the initial exit poll results indicated "a complete lack of confidence in Netanyahu and his October 7 government." Exit polls are not official results, which are due on Nov. 4. Turnout was about 77.7%, the highest for a Knesset election in 27 years, according to the Central Elections Committee.

The vote was Israel's first national election since Hamas's Oct. 7, 2023 attack and the wars in Gaza, Lebanon and Iran that followed. It was widely viewed as a referendum on Netanyahu's dominance of Israeli politics since 2009. Supporters credit him with guiding the country through the war and resisting international pressure. Critics cite his long-running corruption trial, his controversial judicial overhaul efforts and his handling of the Gaza war. He also faces an International Criminal Court arrest warrant over the Gaza campaign, which he has rejected.

Coalition talks could hinge on the strong showing of Arab-led parties. Ra'am leader Mansour Abbas said "our vote will change the government." Analyst Amin Saikal of Singapore's S. Rajaratnam School of International Studies said these parties' pro-Palestinian stance aligns them more closely with Eisenkot, though neither man has said he would embrace them. Michael Feller, chief strategist at Geopolitical Strategy, said Eisenkot would struggle to form a majority without Arab and left-wing parties. Avigdor Liberman of Yisrael Beytenu, projected at seven to nine seats and currently in the opposition bloc with Eisenkot, refused during the campaign to rely on Arab parties.

On Tuesday, Netanyahu and his far-right partners warned about strong Arab turnout, drawing accusations of racism from opponents. "If we don't wake up now, we'll find ourselves with a government of Mansour Abbas and Ahmed Tibi," Netanyahu said.

Saikal said Netanyahu could use the coming weeks or months to stall the formation of a new government, and that he will "fight for his political survival." Netanyahu became the country's longest-serving prime minister after past stalemates kept him in office, including during five elections between 2019 and 2022. P.R. Kumaraswamy of Jawaharlal Nehru University expects prolonged negotiations once final results are announced. "It is too early to write him off," he said.