(Updates prices)

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Markets unnerved, but not derailed by politics

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Deepening French political crisis weighs on euro

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Gold, bitcoin jump as investors seek alternatives

By Amanda Cooper

LONDON, Oct 7 (Reuters) - Global stocks and bonds

regained some stability on Tuesday, as political upheaval in

France, Japan and the U.S. rippled through markets, but did not

offset underlying investor optimism over a possible boost from

lower U.S. interest rates.

In Europe, the euro fell for a second day, while stocks

cut earlier losses to rise modestly, although volatility was

more contained, as investors awaited developments in France,

where the shock resignation of Prime Minister Sebastien Lecornu

on Monday threw Europe's second-biggest economy deeper into

crisis.

Meanwhile, the week-old U.S. government shutdown rumbled on,

with little sign of the impasse breaking.

And in Japan, investors snapped up a sale of government debt, in

a sign of easing nervousness after Sanae Takaichi, a proponent

of low rates and high spending, was elected leader of the ruling

party, prompting a selloff in domestic bonds and the currency

and sending stocks to record peaks.

STOCKS NEAR RECORD HIGHS

That said, world stocks hovered near record

highs, underpinned by optimism over the likelihood of rate cuts

from the U.S. Federal Reserve and by another jolt of AI-related

euphoria following a multi-billion-dollar chip-supply deal

between AMD and OpenAI.

"The fundamental narrative is still one of Fed rate cuts,

and that is likely to continue for the remainder of the year and

into next year," said Daiwa Capital economist Chris Scicluna.

"Coupled with the AI story and the boost to the demand in

activity that is going to be associated with it ... is something

that should sustain demand for risk assets," he added. "You've

got political noise maybe interrupting that, but it's certainly

not a showstopper at the moment."

The dollar rose 0.3% against a basket of currencies, led

mainly by gains versus the euro and the yen, which

struggled at two-month lows on the weaker side of 150 per

dollar, eliciting a warning from Finance Minister Katsunobu Kato

about excess volatility.

"The yen looks likely to remain under pressure for some

time. The political shift under Sanae Takaichi has reinforced

expectations that fiscal stimulus will take precedence over

monetary tightening, reducing the odds of a near-term BOJ rate

hike," said Tareck Horchani, head of prime brokerage dealing at

Maybank Securities.

"Fiscal expansion financed by higher bond issuance is also

steepening the yield curve and weighing further on sentiment

toward the currency."

On the European market, the STOXX 600, which hit record

highs last week, reversed earlier losses to rise 0.2%. Paris'

CAC 40 followed suit, rising 0.3%, having posted its

largest one-day fall since late August on Monday.

President Emmanuel Macron, who is facing growing pressure to

hold snap parliamentary elections, or even resign, has given

Lecornu a chance to hold last-ditch talks with members of

various parties on Tuesday to seek a way out of the crisis.

French bond yields rose 2 basis points to

3.59%, matching Monday's highs, while the euro remained

under pressure, easing 0.3% to $1.1674.

WORLD BANK UPS CHINA 2025 GROWTH FORECAST

Political undercurrents aside, U.S. stock futures

dipped just 0.1%, pointing to a softer open later for the

benchmark indexes, which hit all-time highs on Monday.

The World Bank, meanwhile, lifted its forecasts for Chinese

growth in 2025 and those for much of the region, although it

warned of slowing momentum next year.

In commodities, oil prices dipped, leaving Brent crude futures

down 0.14% at $65.38 a barrel. Gold steadied

around $3,959 an ounce, having hit an all-time high earlier of

$3,977.19 an ounce, while bitcoin hovered just below a

record $126,223.