The Zhitong Finance App learned that voting for Israel's 26th parliamentary election ended on October 27 (Tuesday). As the vote count progressed, the camp led by current Prime Minister Benjamin Netanyahu (Benjamin Netanyahu) changed from backward to overtaking, but neither camp received the 61 seats needed to form a cabinet in the 120-seat parliament. The result hit Israel's own assets directly on Wednesday.
Three types of assets dive at the same time
The shekel depreciated by about 1% against the US dollar, the biggest intraday decline in two weeks, and was one of the worst performing currencies in the world on Wednesday; Tel Aviv's benchmark stock index fell 2.7% to the biggest one-day decline since June; Bank Hapoalim (Bank Hapoalim) fell about 4%, and Phoenix Financial (Phoenix Financial) fell more than 5%. The bond market weakened at the same time: the yield on US dollar bonds due in January 2036 and worth 2 billion US dollars rose to 5.9%, ending the previous week of continuous decline. Israeli dollar bonds outperformed emerging markets and regional peers.
Market disappointment is not “who wins”, but “nobody wins”
The exit poll on Tuesday evening once pointed to a change in the sky — Israel's public broadcaster Kan's exit poll showed 53 seats for the Gadi Eisenkot (Gadi Eisenkot) camp and 50 seats for Netanyahu; the two TV polls compiled by Al Jazeera also showed that the opposition was 52 seats ahead of 50 seats. However, after more than half of the vote count on Wednesday, Netanyahu's camp overtook: Al Jazeera quoted data from the Central Election Commission. At 72% of the vote count, Netanyahu had 54 seats, the Esenkot camp had 48 seats, and the Arab party had 18 seats.
This is where the price reaction falls. Shekel's trend “means that the market is disappointed that the Esenkot camp failed to give a decisive blow to the pro-Netanyahu camp,” said Piotr Matys, senior foreign exchange analyst at ITC Markets, “Israel may face a period of intense political altercation.” Both sides claim that they will take the lead in forming the next government, and the composition of the new government may take several weeks to be finalized; according to Gokhshtein Media, President Herzog will approve cabinet formation candidates after consulting with the leaders of various parties. Those authorized will have 28 days. Failure will trigger another election.
National ledgers: budgets, deficits, and ratings are real pressure points
The political impasse is not an emotional issue for Israel itself. Defense spending is already close to 8% of GDP, the highest among Western economies; Netanyahu supports a 12-year 450 billion shekel arms expansion plan, and the Bank of Israel warned that this could push debt to 85% of GDP by 2035. Data from Israel's Ministry of Finance showed that debt/GDP was 67.9%, the 2026 deficit target was 4.9%, and the deficit narrowed from 4.7% to 3.3% in the past year.
In terms of ratings, S&P and Fitch maintained A, and Moody's maintained Baa1. S&P and Moody's raised their outlook from negative to stable in November 2025 and January 2026, while Fitch maintained a negative outlook in March 2026; as of October 2026, no agency had raised the rating itself. Fitch has previously stated that political instability will make it difficult to cut the deficit. The longer the cabinet is formed, the more blurred the budget and fiscal path will become. Only then will this really weigh down on the pricing of sovereign bonds.
Will it spread to global financial markets? Judging from equity and bond remittance, the impact is limited
According to MSCI standards, as of August 31, 2026, MSCI Israel IMI had 119 constituent stocks with a total market capitalization of US$409.811 billion, of which Workers' Bank weighed 8.24% and Phoenix Financial 3.48% — it was the local weighted stocks that fell the hardest on Wednesday. But in the global portfolio, this is very small: the iShares MSCI Israel ETF (EIS), which tracks this market, is only about $900 million. More importantly, foreign capital is already low — according to Copley Fund Research data, the share of Israeli shares held by global funds has fallen sharply to an all-time low since 2023. The low allocation not only means that this round of selling pressure lacks the amplification of “foreign investment trampling”, but also means that the price flexibility of Israeli assets is mainly determined by local capital.
The main battleground for Israeli technology companies is NASDAQ rather than Tel Aviv: Teva Pharmaceuticals ADR is MSCI Israel IMI's largest weight (10.24%, free circulation market value of US$41.977 billion), Gaota Semiconductor 5.57%, Elbit Systems 4.79%, and Check Point 2.65%; Monday.com, Wix, etc. are mainly listed in the US. Equity level channels are also deepening — after Palo Alto Networks completed the $25 billion acquisition of CyberArk in February 2026, it was dual-listed in Tel Aviv under the CYBR code, becoming the company with the highest market capitalization in the region. However, the current sell-off is focused on local banks and insurance in Israel. Such assets are sensitive to domestic interest rates and domestic finances; Israeli technology companies listed in the US do not directly bear this domestic risk. As far as the US stock index is concerned, both weight and transmission are almost negligible.
Another local US exposure that is easily overlooked: since October 7, 2023, more than 44 US states, cities, and local governments have bought nearly $4 billion in Israeli bonds. This figure is given by issuer representatives and needs to be viewed with caution; the same interview mentioned that the cost of default insurance for Israel's sovereign debt has dropped to about 59 basis points, close to pre-war levels. This type of exposure is small in scale, and lasts too long. It also poses no systemic risk to the US financial system, yet it is one of the few channels where Israel's credit directly connects to the US balance sheet other than oil prices.
The real transmission route is the price of oil
Before the election, DeVere's Green pointed out the transmission path: “A person who has never held Israeli stocks is still exposed to this incident through oil” — if Iran were to be hit again, rising energy prices would drive up inflation and government borrowing costs. However, oil prices are currently falling: at the close of trading on Tuesday, WTI's main contract fell 1.53% to 100.20 US dollars/barrel, Brent fell 0.9% to 109.74 US dollars/barrel; COMEX gold futures rose 0.86% to 4073.10 US dollars/ounce. The market did not raise the price for the escalation of the Middle East conflict over this impasse.
Although both camps regard Iran as the primary security threat and both support military action against Iran's nuclear facilities when necessary, they have substantial differences in their war goals and preferences. This is the transmission mechanism that influenced the US-Iran conflict by the general election.
Netanyahu route: active escalation aimed at “regime change”
Before the election, Netanyahu clearly raised the military target to overthrow the Iranian regime, saying this was the “only way” to eliminate the threat. He advocated that Israel take the initiative to shape a military agenda against Iraq, and even act alone if necessary. There were reports before the election that Netanyahu promoted a large-scale joint attack on Iran before the Israeli or US elections, but the plan was not implemented due to Trump's opposition and the cautious attitude of the Israeli Chief of General Staff. If Netanyahu succeeds in forming a cabinet, Israel will be significantly more motivated to take the initiative to drag the US into or escalate the conflict, and the risk of a US-Iran war will rise as well.
The Essencourt Route: A bundled strategy characterized by “limited impact+economic pressure”
Esencott also regards Iran's nuclear program as an unacceptable red line, but he clearly believes that overthrowing the Iranian regime “is not an attainable goal” and opposes regime change as the purpose of war. He argues that economic pressure should be used as the primary tool to force Iran to make concessions, and that military attacks should be limited to nuclear facilities and missile programs, not an all-out war. In terms of alliances, Esencott placed more emphasis on close coordination and “long-term combat” with the US, rather than Israel's unilateral dominance of escalation. If the opposition takes the lead in forming a cabinet, Israel's “extreme military pressure” on Iran will be relatively subdued, but it will still keep pace with the US, and there will be no fundamental shift in its tough strategy against Iraq. The risk of war will not go away, but the triggering method will depend more on the pace of Washington's decisions than on Jerusalem's active push.
What do agencies think: Standstill is the worst situation, but history usually heals itself
J.P. Morgan previously estimated that the shekel may fluctuate by up to 3% due to election results; Rafi Gozlan, chief economist at IBI Investment House, believes that the opposition's cabinet formation may lower the risk premium and put pressure on the shekel to appreciate. Green emphasized that the standoff is the worst for global investors — the caretaker prime minister still has the power to order new attacks. “For those with oil, bonds, or emerging market assets, this is the scenario to keep an eye on.” TT International's Jean-Charles Sambor looked beyond Israel, believing that easing the situation might benefit Lebanon's sovereign debt.
The high base also amplified fluctuations: since October 2023, the Tel Aviv stock market has accumulated a cumulative increase of about 130%, the shekel has appreciated by about 25%, and the stock exchange rate has fallen by about 10% (deVere) since May. According to the Tel Aviv Stock Exchange's research on the past 10 general elections, the digital momentum increased by up to 45% after voting, but the initial decline usually recovered within a month, and the index rose by an average of 1.7%; the average return of TA-125 in the year after the election was 16.4%, higher than the long-term average annual level of 11.5%.