Israeli stocks fall, shekel weakens as Netanyahu bloc beats election forecasts

JERUSALEM/LONDON, Oct 28 (Reuters) - Israel's currency, stocks and bonds came under pressure on Wednesday as initial election results showed Prime Minister Benjamin Netanyahu's right-wing bloc performing better-than-expected but falling short of a parliamentary majority.

With some 86% of votes tallied, Israeli media projected Netanyahu's right-wing bloc to win 53 seats, well ahead of the 48 forecast for rival Gadi Eisenkot's opposition bloc but short of the 61 needed for a majority in the 120-seat parliament. Arab parties were on course to win 19 seats.

Definitive results were expected on Thursday.

The shekel weakened more than 2% to 3.1208 to the dollar, on course for its worst day since the aftermath of ⁠the October 2023 Hamas attacks and erasing Tuesday's gains, when high voter turnout had raised expectations of a change in government.

Tel Aviv's key benchmark stock index was down 2.5% , its worst performance in more than four months. The market had been closed on Tuesday.

Opinion polls ahead of the election showing Eisenkot in the lead had helped gains, with some investors expecting a change in government to improve relations with Western allies, reduce regional tensions and bring an end to a judicial overhaul that sparked mass protests in 2023.

Longer-dated international debt also came under slight pressure, reversing recent gains and bucking the wider market trend. The 2060 bond slipped nearly 0.4 cents to bid at 62.54 cents on the dollar, Tradeweb data showed.

Yields on the benchmark domestic 10-year government bond rose nearly 5 basis points to 4.13% .

"Israel's financial markets have reacted negatively to the result," said William Jackson, chief emerging markets economist at Capital Economics. He said the initial ⁠results offered Netanyahu more paths to remain in power, though any government that emerged was unlikely to be robust.

"The next government will probably be fragile," he said.

If neither Netanyahu nor Eisenkot can form a government, Israel would likely head to another election, with Netanyahu remaining at the helm of a caretaker government in the meantime.

Israel's markets have risen strongly despite three years of war and political turmoil, supported by the country's large tech sector, the AI boom and elevated defence spending.

Since the October 7 Hamas ⁠attacks in 2023, the Tel Aviv blue chip index (.TA35), opens new tab has risen more than 130%, far outpacing a roughly 80% rise on Wall Street, while the shekel has climbed around 25%, one of the world's strongest currency performances over the period.

Analysts said forming a government could prove difficult, prolonging political uncertainty and raising the prospect of another election in ⁠the first half of next year. A major escalation of the conflict with Iran remained another key risk for investors.

Barring such an escalation, however, the market moves reflected sentiment more than a shift in Israel's economic fundamentals, said Abdalla Saleh, senior analyst for MENA country risk at BMI.

"They reflect investor uncertainty ⁠regarding the election outcome and uncertainty regarding its economic implications," he said. BMI recently upgraded its growth outlook for this and next year, with expansion expected to be driven by domestic consumption and company investment.

"At the end of the day, right now, we don't have any indication that there will be an unfavourable shift in Israel's economic fundamentals."

Reporting by Steven Scheer in Jerusalem and Karin Strohecker in London, editing by Keith Weir

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Karin Strohecker

Thomson Reuters

Karin Strohecker is the London-based Global Chief Correspondent for Emerging Markets, leading a team that covers debt and economic issues and investment trends in developing nations around the globe. Having joined Reuters more than 20 years ago, Karin has worked in text and television in Frankfurt, Berlin and Vienna, covering major events such as IMF World Bank meetings in Washington, the World Economic Forum in Davos, OPEC meetings and the World Cup.