Israel Market Risks Shift to State Budget and Bond Yields, Says Karni
Dror Karni warns that Israeli market risks extend beyond elections to the state budget and bond yields, as Tel Aviv stocks and the shekel experience high volatility amid political shifts and Wall Street fluctuations.
The risk to the Tel Aviv Stock Exchange does not end with elections; it shifts directly to the state budget, the shekel, and the bond market, according to Dror Karni, CEO and founder of Karni Family Office. Market focus globally centers on sector rotation and the repicing of technology investments, while Israel faces fundamental questions regarding its ability to form a stable government capable of passing a budget and enacting credible fiscal policy.
Political and fiscal uncertainties continue to weigh on the domestic market. Without a timely approved budget, the economy risks entering a regime of continuous budgeting that restricts fiscal flexibility. Although past periods saw local markets narrowing gaps with global indices following political clarity, the economy currently shoulders a substantial deficit and a continuous security burden. Without strict fiscal discipline, these disparities are likely to persist.
Congressional Shifts and Geopolitical Risk
For Israel, a divided US Congress could increase oversight on military aid, armaments, and regional policy, exerting pressure toward diplomatic settlements. While this does not mean American aid will halt, uncertainty surrounding its conditions and operational freedom enters investor risk calculations. Potential progress in ceasefire processes could also influence demand expectations within the defense sector.
The shekel and government bond markets serve as primary barometers of domestic economic risk. Security expenditures and state borrowing needs threaten to maintain upward pressure on long-term yields. If investors demand higher compensation for fiscal and security risks, financing costs will rise, particularly impacting leveraged sectors such as real estate and construction.
Currency Pressures and Market Volatility
Political and security uncertainties could trigger shekel depreciation, which would elevate import costs and potentially limit the Bank of Israel's capacity to reduce interest rates, especially if energy prices remain elevated. Conversely, regional stabilization and credible fiscal policies could reduce the risk premium. Investors must monitor long-term bond yields, the exchange rate, and the legislative progress of the state budget.
Trading on the Tel Aviv Stock Exchange unfolded amid volatility on Wall Street and domestic political uncertainty following US midterm elections. Technology stocks faced intense pressure globally amid concerns over high valuations in artificial intelligence firms and infrastructure investments. Meanwhile, the USD/NIS exchange rate fluctuated sharply, reflecting domestic and international developments.
Following the US midterms, the TA-35 index dropped approximately 2% on Wednesday, followed by a 3.7% decline on Thursday. A sharp correction occurred on Friday, with the TA-35 surging over 3% and the TA-125 advancing 2.8%. Simultaneously, the shekel weakened significantly, as the representative dollar exchange rate rose from 3.118 shekels at the end of October to 3.194 shekels on Friday, marking a depreciation of about 2.4% over the week.
