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Netanyahu faces far-right backlash as Trump presses to end Gaza war

UBS
Geopolitics & WarElections & Domestic Politics
Netanyahu faces far-right backlash as Trump presses to end Gaza war

A significant political rift is jeopardizing Israeli Prime Minister Netanyahu's government as far-right coalition partners threaten to withdraw over a U.S.-backed Gaza peace plan. The plan, proposed by Donald Trump, allows for Hamas members to remain if they disarm, which has enraged ultra-nationalist ministers who oppose any concessions and insist on continued military action. This internal dispute risks collapsing the government, triggering early elections, and undermining broader U.S. efforts to expand regional normalization agreements like the Abraham Accords, even as the opposition offers support to pass the plan.

Analysis

US economic rebound could boost Europe’s credit markets, UBS says By Alexander Cornwell JERUSALEM (Reuters) -A rift within Israeli Prime Minister Benjamin Netanyahu’s far-right coalition is emerging as a flashpoint in efforts to end the war in Gaza, threatening to derail a U.S. push to reshape the political landscape of the Middle East. Under pressure from Donald Trump to end the two-year-old war, Netanyahu is facing a backlash from ultra-nationalist allies whose opposition to the U.S. president’s Gaza proposal could force the Israeli leader into early elections. Netanyahu has embraced Trump’s 20-point plan to end the war, which calls for Gaza’s demilitarization and rules out any future governing role for Hamas, though it allows its members to remain if they renounce violence and surrender their weapons. FAR RIGHT WORRIED BY PROSPECT OF A ’REVIVED’ HAMAS Hamas also responded positively, partially accepting Trump’s plan, saying it was ready to negotiate the hostages’ release and would be part of a "Palestinian national framework" as Gaza’s future is addressed. But the idea that Hamas could still exist, let alone be in a position to continue discussing the Gaza plan after hostages are released, enraged Netanyahu’s right-wing coalition partners. "We cannot agree under any circumstances to a scenario in which the terrorist organization that brought the greatest calamity upon the State of Israel is revived," said National Security Minister Itamar Ben-Gvir. "We will in no way be partners to that," he said in a post on X after the Sabbath, threatening to quit the government. If far-right ministers believe Netanyahu has made too many concessions to end the war, his ruling coalition -- the most right-wing government in Israel’s history -- could collapse a full year before the next election, which must be held by October 2026. But insisting on more war in Gaza would antagonise the families of hostages still held by Palestinian militants in Gaza, and could further alienate a war-weary Israeli public as well as Israel’s international allies. Continued conflict could also extinguish Israeli hopes that more Arab and Muslim states like Saudi Arabia or Indonesia could join the Abraham Accords, a set of U.S.-backed agreements that normalized relations between Israel and several Arab states. TRUMP CALLS FOR HALT TO ISRAELI BOMBARDMENT IN GAZA Expanding the Accords has been a priority for Trump as his administration pursues its own interests in the Middle East, but Riyadh has made it clear it will not normalize with Israel until the Gaza war ends and there is a path to Palestinian statehood. Trump has called for Israel to stop bombing Gaza in order for talks on his plan to play out, starting with indirect negotiations between Israel and Hamas in Egypt on Monday for the release of all remaining hostages. But on Saturday, Finance Minister Bezalel Smotrich said that pausing attacks in Gaza was a "grave mistake". He said that over time this would erode Israel’s position as it pursues its aims of freeing the hostages, eliminating Hamas and carrying out the demilitarisation of Gaza. Ben-Gvir and Smotrich, whose parties hold 13 of the Knesset’s 120 seats, have long pushed Netanyahu to pursue sweeping, seemingly unattainable goals in Gaza. If both were to leave the government, it would likely trigger an election. NO GAZA CEASEFIRE YET, SAYS ISRAELI GOVERNMENT Israeli government spokesperson Shosh Bedrosian told reporters on Sunday that the military had stopped what she said was certain bombings but that there was no ceasefire in place. The military would continue to act for "defensive purposes", she said. Despite Trump’s call to halt the bombing, Israeli strikes on Gaza over the weekend killed dozens of Palestinians. Netanyahu has framed the plan as a joint effort that advances the government’s goals, which include Hamas’ surrender and Israeli security control in Gaza and its perimeter. GOVERNMENT COLLAPSE NOT EXPECTED IMMEDIATELY, POLLSTER SAYS But Trump’s plan lacks details, including any sort of time frame for Hamas to disarm. A vague reference to Palestinian statehood is also likely to infuriate Netanyahu’s far-right allies. Israeli pollster Mitchell Barak, who worked for Netanyahu in the 1990s, said he believed that the government was nearing its end, though he did not expect an immediate collapse given that the opposition supports the Trump plan while Smotrich and Ben-Gvir have few options other than staying aligned with Netanyahu. Opposition leader Yair Lapid has offered to lend the government support to prevent it from collapsing in order to see through Trump’s plan. Lapid on Sunday said Netanyahu could agree to an election date, offering "insurance" from what he called the prime minister’s "extremist and irresponsible partners." Significant political instability is developing within Israel's ruling coalition, posing a direct threat to Prime Minister Netanyahu's government. The catalyst is a U.S.-backed Gaza peace plan which has been met with fierce opposition from ultra-nationalist partners, specifically National Security Minister Ben-Gvir and Finance Minister Smotrich. Their primary objection is the plan's provision allowing Hamas members to remain if they disarm, a concession they deem unacceptable. With their parties holding 13 of the 120 Knesset seats, their threatened withdrawal could collapse the coalition and force early elections, well before the October 2026 schedule. This internal crisis complicates the U.S. push for regional de-escalation and jeopardizes broader strategic goals, such as expanding the Abraham Accords, as Saudi Arabia has conditioned normalization on an end to the conflict. The situation is further muddled by an offer from opposition leader Yair Lapid to support the government to pass the deal, creating a volatile political landscape amidst continued Israeli military operations in Gaza.

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Market Sentiment

Overall Sentiment

moderately negative

Sentiment Score

-0.50

Ticker Sentiment

UBS0.00

Key Decisions for Investors

  • Investors should closely monitor the stability of the Israeli government, as the potential collapse of the ruling coalition and subsequent early elections introduce significant geopolitical uncertainty for the region.
  • The political deadlock directly threatens the timeline and viability of expanding the Abraham Accords, potentially delaying or reducing the expected economic benefits from normalization with key states like Saudi Arabia.
  • Given the 'moderately negative' sentiment and high uncertainty, investors should anticipate heightened volatility in Israeli-linked assets and a cautious tone in regional markets, warranting a review of direct exposure until the political outcome is clarified.