Israeli bonds, shekel fall as election leaves Netanyahu and others short of majorities

Israeli assets sold off Wednesday as the country’s election produced no clear winner.

With more than 80% of the votes counted, it appears neither the bloc backing incumbent Prime Minister Benjamin Netanyahu, nor the bloc behind leading challenger Gadi Eisenkot, has won the 61 seats required to form a coalition government.

However, after falling behind its rivals in early counting, the pro-Netanyahu bloc later clawed back a narrow lead of around 54 seats versus 49. Polls suggested that Arab-led parties, which belong to neither camp, earned about 18 seats.

Exit polls are not the official results, which are published on Nov. ​4. Around 77.7% of eligible voters turned out to cast their ballots, the highest in a Knesset election in 27 years, according to the Central Elections Committee.

Eisenkot, a former military chief of staff, earlier in the day had declared victory and said the preliminary result — which had his bloc slightly ahead — should give him the first right to try to form a government. “The initial exit poll results indicate a complete lack of confidence in Netanyahu and his October 7 government,” he said in a statement on X.

The Israeli shekel fell 2% against the U.S. dollar while the Tel Aviv 35 stock index traded 2.3% lower.

Meanwhile, Israeli government bonds came under pressure, with yields rising across the curve. The yield on the 2-year bond added 6 basis points, while the benchmark 10-year government bond’s yield rose by 8 basis points. Longer-maturity 30-year bond yields gained 6 basis points.

Bond yields and prices move in opposite directions.

The vote came as Israel’s first national election since Hamas’s Oct. 7, 2023 attack and the subsequent wars in Gaza, Lebanon and Iran, and was widely seen as a referendum on Netanyahu’s dominance of Israeli politics since 2009.

Because outright majorities are rare, parties typically form coalitions. The president asks a Knesset member — usually the leader best placed to assemble a 61-seat majority — to form a government. If those attempts fail, another election can be called.

Netanyahu’s supporters credit him with steering Israel through the war and standing up to international pressure, while critics point to his long-running corruption trial, controversial judicial overhaul efforts, and handling of the Gaza war as evidence that he is unfit for office. Netanyahu faces an International Criminal Court arrest warrant over the Gaza campaign, which he has rejected.

The historic Arab-party result is a factor to watch in coalition talks. Ra’am leader Mansour Abbas said that “our vote will change the government.” Joint List faction chairman Ahmad Tibi had previously outlined a plan to prevent Netanyahu from remaining in power after the elections, according to the Jerusalem Post.

The pro-Palestinian stance of Arab-led parties aligns them more closely with Eisenkot than with Netanyahu, said Amin Saikal, an adjunct senior fellow at Singapore’s S. Rajaratnam School of International Studies, though neither man has said he would embrace them.

“Even if Eisenkot’s alliance wins more seats, it’s less likely to be able to form a governing majority without including Arab and left-wing parties,” said Michael Feller, chief strategist at Geopolitical Strategy. “The next government’s policies on Iran, Palestine and security may otherwise stay the same.”

However, Yisrael Beytenu leader Avigdor Liberman, whose party is projected at seven to nine seats and is currently in the opposition bloc with Eisenkot, refused during the campaign to rely on Arab parties.

Earlier on Tuesday, Netanyahu and his far-right coalition partners warned of strong Arab participation in the vote, 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,” he said, after a series of posts highlighting long queues at polling stations in Arab communities.

Even if Eisenkot ends up with more seats, Netanyahu may use the upcoming weeks or months to his advantage by seeking to stall the formation of the new government, said Amin Saikal, an adjunct senior fellow at Singapore’s S. Rajaratnam School of International Studies.

The prime minister will “fight for his political survival,” Saikal said.

Netanyahu has become the country’s longest-serving prime minister after past electoral stalemates kept him in office and other parties could not form a governing coalition before deadlines passed. Israel held five elections between 2019 and 2022.

P.R. Kumaraswamy, an emeritus professor of Middle Eastern Studies who specializes in Israeli politics at Jawaharlal Nehru University, expects a prolonged negotiation process after the final results are announced.

“It is too early to write him off,” he said of Netanyahu.