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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

(Updates throughout with comment, European trading)

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 dipped, 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, fell 0.2%. Paris' CAC 40 dipped

0.3%, having posted its largest one-day fall since late August

on Monday.

President Emmanuel Macron 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 edged up 2.4 basis points to

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

under pressure, easing 0.3% to $1.168.

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 steadied on Tuesday, with Brent

crude futures up 0.17% to $65.58 a barrel. Gold

hit an all-time high of $3,977.19 an ounce, while bitcoin

hovered just below a record $126,223.