Updates prices

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 EUR= 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 .MIWD00000PUS 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 =USD, led mainly by gains versus the euro and the yen JPY=, 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 .STOXX, which hit record highs last week, reversed earlier losses to rise 0.2%. Paris' CAC 40 .FCHI 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 FR10YT=RR rose 2 basis points to 3.59%, matching Monday's highs, while the euro EUR= remained under pressure, easing 0.3% to $1.1674.

WORLD BANK UPS CHINA 2025 GROWTH FORECAST

Political undercurrents aside, U.S. stock futures ESc1, NQc1 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 LCOc1 down 0.14% at $65.38 a barrel. Gold XAU= steadied around $3,959 an ounce, having hit an all-time high earlier of $3,977.19 an ounce, while bitcoin BTC= hovered just below a record $126,223.

(Reporting by Rae Wee; Editing by Christopher Cushing, Kim Coghill, Louise Heavens, Alexandra Hudson)

((Rae.Wee@thomsonreuters.com;))