Israeli ultra-Orthodox party leaves government over conscription bill

Israel's United Torah Judaism (UTJ) party has withdrawn from Prime Minister Benjamin Netanyahu's ruling coalition, citing the government's failure to enact a bill exempting ultra-Orthodox yeshiva students from mandatory military service. This defection reduces Netanyahu's Knesset majority to a precarious 61 out of 120 seats, creating significant political instability. The long-standing conscription exemption, a contentious issue exacerbated by a recent Supreme Court ruling and the ongoing Gaza conflict, was a key condition for UTJ's coalition participation, and its removal could trigger further political realignments.

Analysis

The withdrawal of the United Torah Judaism (UTJ) party has critically weakened Prime Minister Benjamin Netanyahu's ruling coalition, reducing its majority to a precarious 61 out of 120 seats in the Knesset. This defection stems directly from the government's failure to pass a contentious military conscription bill that would exempt ultra-Orthodox yeshiva students, a key promise made to the UTJ. The political crisis is exacerbated by two factors: a Supreme Court ruling ordering an end to these long-standing exemptions and the ongoing war in Gaza, which has intensified public debate over the issue. The resulting razor-thin majority creates significant political instability and legislative gridlock, with the government's survival potentially dependent on the actions of the other ultra-Orthodox party, Shas, whose intentions remain unclear. This situation introduces a high degree of uncertainty for policy continuity and governance in Israel.

Key Decisions for Investors

• Investors with exposure to Israeli assets should anticipate heightened market volatility, particularly in the shekel and the Tel Aviv Stock Exchange, due to the increased political instability.
• It is critical to monitor the actions of the Shas party and any developments regarding the conscription bill, as the loss of the 61-seat majority could trigger a snap election and significant policy paralysis.
• Given the elevated uncertainty, a review of exposure to Israeli equities and sovereign debt may be warranted, with a more defensive or hedged posture potentially being prudent until the political landscape stabilizes.
• Refrain from initiating new, aggressive long positions on Israel-focused assets until there is greater clarity on the government's ability to govern effectively or survive a potential no-confidence vote.