Pomegra
Israel's election left Netanyahu and Eisenkot short of 61 seats, sending the shekel down 1% and the Tel Aviv 35 lower as financial markets today price in delay.
- Netanyahu's bloc held 54 seats and Eisenkot's 49 with about 84% counted, both short of the 61 needed.
- The shekel fell about 1% against the dollar and the Tel Aviv 35 traded as much as 2.7% lower.
- Israeli government bond yields rose across the curve as coalition talks look set to run into December.
Lead
Israeli assets sold off on Wednesday, October 28, after a national election produced no clear winner. With roughly 84.5% of ballots counted, Prime Minister Benjamin Netanyahu's right-wing and religious bloc stood at 54 seats in the 120-seat Knesset. The bloc led by former military chief Gadi Eisenkot held 49. Arab-led parties, which sit in neither camp, were projected at about 17 seats. The shekel lost roughly 1% against the dollar, its largest intraday decline in two weeks and among the weakest moves in global currencies that day. The Tel Aviv 35 index fell as much as 2.7%.
What Happened in Israel's Election?
Neither camp reached the 61-seat threshold, and early projections put the prime minister's bloc further from it than polls had suggested. Likud remained the largest single party with about 27 seats. Eisenkot's Yashar party followed with roughly 20 to 21. Turnout reached 77.7%, the highest since 1999.
Eisenkot, who was marginally ahead in some early counts, declared victory and claimed the right to try to form a government. Netanyahu said he would assemble a new coalition and that no leader should rule with the backing of Arab parties. Those parties nearly doubled their representation from 10 seats to between 17 and 19, which makes them arithmetically pivotal. Both main camps have historically refused to govern with them.
Why Did Israeli Markets React This Way?
Markets sold off because a hung parliament delays fiscal decisions and raises the chance of repeat elections. Israel's budget, defense spending and wartime commitments all depend on a functioning government.
Government bond yields rose across the curve. The 2-year yield added 6 basis points, the benchmark 10-year rose 4 basis points and the 30-year gained 2. A basis point is one hundredth of a percentage point. The sharper move at the short end shows investors repricing near-term political and fiscal risk rather than long-run growth.
The selloff also follows a strong run for Israeli assets, which had rallied through the year on a resilient economy and a firmer shekel. Positions built on that momentum added to the speed of Wednesday's decline. The Bank of Israel's policy rate stands at 3.25% after its October 21 decision, so the central bank has little scope to cushion a political shock beyond currency market operations.
How Does Coalition Formation Work From Here?
The process moves in stages and cannot conclude quickly. Final results are expected by Friday and will be formally published on November 4. President Isaac Herzog then consults party leaders and nominates the candidate with the best chance of assembling a majority. That person has up to 42 days to secure 61 seats, with a possible extension if a second candidate is named.
Three paths are visible:
- Netanyahu coalition. He would need to close a gap of about seven seats without Arab parties or Eisenkot's allies, which requires defections.
- Eisenkot coalition. He faces a larger gap and would need either Arab-party support or a split in the right-wing bloc.
- Unity government or new election. A cross-bloc arrangement or a fresh vote would extend uncertainty into 2027.
Geopolitical and Fiscal Context
The vote was the first national election since the October 7 attack and took place against unresolved questions over Gaza, West Bank tensions and relations with Washington. A fragmented Knesset limits the ability of any government to commit to a long-term security or diplomatic course. It also complicates passage of the 2027 budget, which normally needs approval early in the year.
Prolonged caretaker rule would not stop routine government operations, but it narrows room for new spending, tax measures and structural reforms. That is the main channel through which the deadlock reaches the economy, through sovereign risk premiums, the cost of shekel hedging and foreign investor appetite for Israeli equities.
Outlook
The immediate market question is duration. A coalition agreed within weeks would likely reverse much of Wednesday's move. A drawn-out negotiation or a return to the polls would keep a political risk premium in the shekel and bonds. Attention now turns to the final seat tally on November 4, Herzog's nomination decision and whether any Arab-party or right-wing defections shift the arithmetic.
Mentioned tickers: None
